Tax hurdles for higher income earners
The Budget was both kind and cruel to high income earners. On the one hand, there is no change to tax relief for pension contributions, and the income tax additional rate will be reduced. But on the downside, a restriction is to be introduced on the use of certain reliefs.
The income tax additional rate will be reduced from 50% to 45% – from 42.5% to 37.5% for dividends – after 5 April 2013. So what should additional rate taxpayers be doing? Consider legitimately delaying income until next year. If you have your own company, then bonuses and dividends can be postponed, and this has the added benefit of later due dates. Delay cashing life policies, if these will result in chargeable gains. If you are self-employed, you may be able to bring forward revenue and capital expenditure that will reduce your assessable profits for 2012/13. And where possible make pension contributions and charitable donations this year rather than next. And that leads us to the proposal that has attracted widespread criticism.
From 6 April 2013, the proposal is that a cap will apply to most reliefs that are currently unlimited. The cap will be the higher of £50,000 or 25% of a person’s income, and excess amounts will not qualify for a tax deduction. From the moment this was announced, charities expressed concern that a cap would discourage philanthropic donations, and the furore was such that the Government has just announced that charitable donations will not now be included – they can continue to be made without limit. At least this aspect would have been easy to understand. We will have to wait until the summer consultation document before the effect on trading losses can be fully understood. Carrying losses forward or back against profits of the same trade will not be affected. But what if a trading loss is claimed against total income of the loss making year and/or the previous year? A previous year claim will be wholly or partly against trading profits, so how are these to be treated? And for which year (or years) will the 25% limit apply?
The cap will particularly hurt those with volatile income levels. Individuals who suffer losses on investments in unquoted trading companies will be affected, and it may be worth making negligible value claims this year to crystallise losses before the cap bites.
The cap will also affect qualifying loan interest, and it will apply across all uncapped reliefs on a combined basis. Reliefs that are already capped, like pensions and enterprise investment scheme and venture capital trust investments, will not be affected.
Another proposal subject to consultation, which will be followed by legislation next year, is the introduction of a general anti-abuse rule. Currently, the UK has a series of targeted rules against tax avoidance, and the introduction of such a general rule in other countries has shown how difficult it is to formulate a provision that both clarifies what it does and doesn’t cover and is practical to implement. The concern is that a general rule against tax avoidance could catch more targets than is intended and could introduce enormous uncertainty into the tax system.
Everything covered in this story so far is for the future. But the Budget also introduced several targeted anti-avoidance provisions with immediate effect, including a 15% stamp duty land tax rate where companies are used to acquire residential property valued at over £2 million.
If you are concerned that any of these changes will affect you, please contact us.