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Tony Wickenden: Shine a light on clarity

One of the Budget proposals that has generated most debate is in relation to the proposed cap on currently uncapped tax relief. It is always a bit of a mug’s game to try to give definitive guidance based on press releases and no legislation, so clarification has been eagerly awaited, especially by charities and philanthropists.

Our wait for at least some further clarity is over. We have moved a few steps further towards the white light of clarity (but by no means all the way) with the issue of the HMRC and Treasury joint clarification note giving further details on how this cap on tax reliefs (which are currently uncapped) will operate. The new provisions propose that certain currently uncapped reliefs will be subject to an annual cap per individual of the greater of £50,000 and 25 per cent of income.

The main points of the note are that:

i: the cap will apply to charitable donations

ii: the cap will apply to loss reliefs that can be claimed against total income, qualifying loan interest relief and a number of other smaller reliefs
iii: the cap will not apply to:

  • The ordinary carrying back or forward of losses against profits of the same trade
  • Notional tax on life insurance gains. This would seem to be aimed at the basic-rate tax credit for UK life policies. Clarification will be needed before we can be certain whether and, if so, how, deficiency relief will be affected
  • Reliefs that are already capped, for example, pensions tax relief, EIS and VCT investments, computational reliefs which should, it is hoped, exclude top-slicing relief in relation to chargeable event gains under life policies
  • The guidance indicates that there will be a need for a new definition of “income” for the purposes of applying the cap.

In connection with the definition of “income”, for the purposes of the cap, the clarification note states that: “To ensure that there is a level playing field regardless of how, for example, pension contributions are made, there will be a new definition of income for the purposes of calculating the reliefs individuals are able to claim.”

’The clarification document quotes the US and other countries as restricting tax relief (including relief on charitable giving) and so makes the pointthat the proposed cap on tax relief should not be seen as being particularly unusual in a global context’

This would seem to mean that an individual’s income for the purposes of the new rule will be income before the deduction of pensions contributions.

“Also, some reliefs (such as gift aid) reduce tax liability in a different way, the self-assessment return will calculate the amount of relief to make it equivalent to those reliefs that offset income.”

The clarification also gives a simple example of how the cap would work:

“An individual has a total income of £250,000 under the new definition. He claims:

  • Qualifying loan interest relief of £40,000
  • Relief for a donation of shares, valued at £25,000, to charity; and
  • Has invested £50,000 under the enterprise investment scheme

As the total uncapped relief claim (of £65,000) exceeds the £50,000, a cap of 25 per cent of income will apply. This means the total allowable uncapped relief will be £62,500.

The investment of £50,000 under the EIS will be unaffected but if the EIS shares are later disposed of at a loss, any loss relief claimed may potentially be subject to restriction if the total reliefs claimed in the same year exceed £50,000.”

While the clarification delivers some valuable additional understanding, more clarification is needed on particular issues and this will no doubt emerge through the consultation. It is reassuring that already capped reliefs will be unaffected but many will find it surprising that it is intended that the cap will apply to charitable giving. This has triggered much comment with interesting philosophical debate over the relative merits of money passing to charities through donations and to the Government to spend on (according to them) non-charitable but nevertheless worthy causes.

The clarification document quotes the US and other countries as restricting tax relief (including relief on charitable giving) and so makes the point that the proposed cap on tax relief should not be seen as being particularly unusual in a global context.


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