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Tony Wickenden: How Govt changes affect income tax relief caps

Tony Wickenden Tax Planning Technical Area

Last week I looked at the General Anti-Abuse Rule. This week I would like to look at the cap on income tax reliefs.

The Government announced at Budget 2012 the introduction of a limit on currently uncapped income tax reliefs from April 2013. The limit will cap the relievable amount for a tax year at the greater of £50,000 and 25 per cent of the individual’s “adjusted total income” (see final paragraph).

Subsequently, the Government announced that this would not apply to payments to charity or tax relievable payments which are already capped [eg registered pensions, Enterprise Investment Schemes or Venture Capital Trusts].

A consultative document was issued in July 2012 on this initiative. Following representations from interested bodies, the Government has now confirmed that:

(a) share loss relief for shares qualifying for the EIS/Seed Enterprise Investment Scheme (SEIS) should be excluded from the cap. Share loss relief on shares not within the EIS/SEIS will remain within the cap.

(b) special consideration will be given to the issue of ‘overlap relief’. This is provided to prevent the double taxation of profits over the lifetime of a business.

Applying the tax relief cap in these circumstances may cause the unintended consequence of denying overlap relief. In light of this, the Government will make a technical adjustment to remove trade loss relief and early trade loss relief attributable to overlap relief from the scope of the cap. Overlap relief will now align with the other computational reliefs originally excluded from the cap.

Subject to these changes, the Government has confirmed that legislation will be introduced in the Finance Bill 2013 to apply the proposed cap on income tax reliefs claimed by individuals from 6 April 2013. The cap will apply to the reliefs set out below.

The reliefs that are affected are as follows:

  • Trade loss relief against general income – available for losses made by an individual carrying on a trade, profession or vocation. This will exclude relief for losses attributable to overlap relief and to the Business Premises Renovation Allowance;

  • Early trade losses relief –available to an individual in the first four years of the trade, profession or vocation. This will exclude relief for losses attributable to overlap relief and BPRA;

  • Post-cessation trade relief –available for qualifying payments or qualifying events within seven years of the permanent cessation of the trade;

  • Property loss relief against general income – available for property business losses arising from capital allowances or agricultural expenses. This will exclude relief for losses attributable to BPRA;

  • Post-cessation property relief – available for qualifying payments or qualifying events within seven years of the permanent cessation of the UK property business;

  • Employment loss relief –available in certain circumstances where losses or liabilities arise from employment;

  • Former employees deduction for liabilities – available for payments made by former employees for which they are entitled to claim a deduction from their general income in the year in which the payment is made;

  • Share loss relief on non-EIS/SEIS shares – available for capital losses on the disposal (or deemed disposal) of certain qualifying shares;

  • Losses on deeply discounted securities – available only for losses on gilt strips and on listed securities held since at least 26 March 2003; and

  • Qualifying loan interest –available for interest paid on certain loans. These include loans to buy an interest in certain types of company, or to invest in a partnership.

An individual’s income will be calculated for the purposes of the limit as the same for all affected individuals as their total income liable to income tax. This figure will then be adjusted to include an individual’s charitable donations made via payroll giving and to exclude pension contributions, to create a level playing field between those whose deductions are made before they pay income tax, and those whose deductions are made after tax.

The result, ‘adjusted total income’, will be the measure of income for the limit. The limit will apply to the year of the claim and any earlier or later year in which the relief claimed is allocated against total income. The limit will not apply to relief offset against profits from the same trade or property business.

Tony Wickenden is joint managing director at Technical Connection

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