Income tax reliefs: will the cap fit?
The Government recently launched its consultation on capping unlimited income tax reliefs.
As announced in the March 2012 Budget, an individual will only be able to claim reliefs up to the higher of £50,000 or 25% of their income. The original proposal provoked widespread protest from charities, concerned that a cap would discourage philanthropic donations. The Government therefore stated that reliefs related to charitable giving would be excluded, and this is confirmed in the consultation document.
The cap will apply only to those reliefs that are offset against a person’s general income and which are not currently capped. So it will mainly apply to certain loss reliefs and relief for qualifying loan interest. Reliefs that are not affected include capital allowances, double taxation relief, pension savings as well as relief under venture capital trusts (VCT), enterprise investment schemes (EIS) and seed enterprise investment schemes (SEIS). The ability to carry forward trading losses against future trade profits is also unaffected. The most important losses that could be restricted are:
- Trade loss relief – claimed against income (and potentially chargeable gains) for the loss making year and/or the preceding year. Any restricted loss can still be carried forward.
- Early trade losses relief – a loss made in the first four years of trading can be set against income for the preceding three years. Any restricted loss can still be carried forward.
- Share loss relief – available for what would otherwise be a capital loss on the disposal of shares in unquoted trading companies. Relief is available against income for the year of the disposal and/or the preceding year. This includes EIS shares, even though EIS relief itself is not restricted. Any restricted loss can still be used as a capital loss and set against chargeable gains.
The first tax year to be affected will be 2013/14, but the cap could apply to earlier years if a loss made after 5 April 2013 is carried back. When calculating the 25% limit, the income figure used will be adjusted so that individuals making pension contributions and/or charitable donations are all treated the same, regardless of how these deductions are given. For example, an individual with an income of £250,000 for 2013/14 who makes gross personal pension contributions of £30,000 will be treated as having income of £220,000. The 25% limit will therefore be £55,000.
The cap itself will apply to each year that relief is claimed, and, strangely enough, this could be beneficial in some situations. Suppose that the individual referred to above has a trading loss of £80,000 for 2013/14 and adjusted income of £220,000 for 2012/13. Without a cap the whole loss would be relieved in either 2012/13 or 2013/14, so only £70,000 would attract relief at the additional rate. The cap will restrict relief to £55,000 in whichever year it is initially claimed, with the balance relievable in the other year. So the whole loss will be relieved at the additional rate.
The other relief most affected will be qualifying loan interest, including where money is borrowed personally for use in the borrower’s company. Such loans may have been taken out several years ago, and so the proposed restriction is in effect retrospective. Also, relief is only available against income for the year that interest is paid, and will be lost if the cap applies. This might mean having to reorganise how a business is financed, with the company borrowing money rather than the individual.
The proposals may yet change, but if you think you might be affected please get in touch to discuss what can be done to minimise the impact.