Last week, I considered the current high profile of anti-avoidance provisions, with special reference to the latest raft of provisions in the 2012 Budget and the much discussed, well, at least pondered, proposal to limit income tax relief claimed by individuals to the greater of £50,000 and 25 per cent of income from April 6, 2013.
As well as referencing the reassuring official statement that these proposed new relief- capping provisions would not apply to reliefs that were already capped under the current law, I looked at the treatment of capital losses made in relation to investment in new qualifying companies.
If the proposed new rules applied to this type of loss relief then, from April 6, 2013, the amount of loss relief available will be capped at the greater of £50,000 and 25 per cent of the investor’s income. This would mean someone earning £400,000 would have this relief capped at £50,000 regardless of whether the actual loss sustained exceeded this amount.
We shall have to see whether this type of relief would be affected by the proposed new provisions. What is meant by an existing relief being already capped will also be important.
Another possible target is qualifying loan interest relief (for example, on loans to be used for business purposes or to invest into businesses).
There has also been some talk of the provisions potentially applying to deficiency relief in relation to past chargeable-event gains made under life policies. Apparently, clarification is being sought on this point. Deficiency relief was in the (Budget ) news itself with proposed anti-avoidance provisions (and draft legislation) preventing this relief where the past gains (for which relief is sought) did not form part of the total income of the person claiming the relief.
This typically affects UK resident investors in offshore bonds who, having triggered a non-taxable gain while non-resident, seek to use the gain to reduce their UK tax liability once UK-resident.
It should, however, be noted that targeted measures were put forward in 2009 to prevent sideways loss relief being given against the claimant’s other income or capital gains where the loss arises from avoidance arrangements. These are defined as “any arrangements of which the sole or main benefit is to secure a reduction in a tax liability through the sideways relief”. Any new arrangements (such as those now proposed) would presumably supplement these provisions.
Concern has, understandably, been expressed over the potential impact of these proposed new relief capping provisions on charitable giving. This seems to have been recognised officially and it will no doubt be clarified in the consultation.
It seems clear though that the measure excludes investments in tax-efficient schemes that already have a defined cap on the relief they offer. These include venture capital trusts (£200,000) and enterprise investment schemes (£1m from April 6, 2012). Seed Enterprise Investment Schemes have been introduced from April 6, 2012 with a maximum investment of £100,000.
It may well be that this Budget announcement follows on from an HM Revenue & Customs consultative document issued on June 30, 2011 in which it was proposed that there would be a cap of £25,000 in any one year on losses that can be relieved against general income or capital gains. This document proposed that legislation would be introduced in the Finance Bill 2013 “at the earliest”. One of the main representations against this proposed legislation was the fact that it did not appear to distinguish between those making a claim for genuine loss relief and those engaged in avoidance schemes.
It is to be hoped that the new measures will so distinguish and focus on non-commercial arrangements only and HMRC has recently confirmed the cap will not apply to the ordinary carrying back or forward of losses against profits of the same trade.
It is a relief that it appears that this capping proposal seems not to be aimed at limiting tax relief on payments to pensions, VCTs and EISs. The limitations proposed (whatever shape the new legislation finally takes) may, nevertheless, focus people’s minds on the importance of maximising the use of known, tried and tested tax-efficient investments which have a cap as to the amount of the permissible investment.