Aside from the granny tax, the reduction in the additional rate to 45 per cent and the child benefit changes, anti-avoidance was a very prominent part of this year’s Budget proposals.
Unsurprising really, as there is a nice symmetry to be had between tougher antiavoidance provisions and tax reduction at the top end… for high-earners.
“Yes, we are giving a tax reduction but we are compensating with tougher anti-avoidance rules, especially in relation to the emotive issue of stamp duty land tax.” Our words, not the Government’s, but, we think, a reasonably accurate reflection of official sentiment.
And it was in the context of the SDLT anti-avoidance provisions that the Chancellor spoke these words: “Let me make this absolutely clear to people. If you buy a property in Britain that is used for residential purposes, then we will expect stamp duty to be paid. That is the clear intention of Parliament. I will not hesitate to move swiftly, without notice and retrospectively if inappropriate ways around these new rules are found. People have been warned.”
The important thing about these words (even though, in context, they are related to SDLT) is that they show the strength of official intent to get their way once they are set against avoidance that they consider repugnant or even just plain unacceptable.
Consequently, those considering more racy tax planning schemes and new versions of plans that have already been anti-avoidanced (if you know what I mean), run risks and need to go in with a clear appreciation of the potential down-side and cost of failure or even just the fight with officialdom.
We have seen proposals (and even draft legislation) for two arrangements using life policies (fortunately no retrospection) and we have the new provisions limiting the tax freedom on qualifying policies to get to grips with too.
While on the subject of limiting tax relief, one of the more mysterious announcements in the Budget (which was also referred to in the Chancellor’s speech) was the imposition of a limit on income tax reliefs. Details of how this would work were sparse to non-existent.
For the record, it was reported as follows:
The Government will, from April 6, 2013, introduce a new cap on income tax reliefs to ensure that those on higher incomes cannot use income tax reliefs excessively. For anyone seeking to claim more than £50,000 of relief, a cap will be set at 25 per cent of income (or £50,000, whichever is greater).
At the time, there was general concern as to the type of tax-efficient investments the Government had in mind. For example, would payments into registered pension plans, VCTs or EISs be affected?
Reassurance that this would not be the case was in the shape of the existence of a cap on the amount that could be placed in these investments. Further, various statements made in the Treasury Red Book indicated that the measures were not intended to apply to investments that already incorporated a tax relief.
“This new limitation will not be extended to those reliefs that are already capped, as to do so would reduce the amount of support the tax system gives to, for example, enterprise and pension contributions.”
Thoughts on what the Government intends in relation to this provision are now slowly emerging. It is still difficult to be certain but it would seem that the new rule could, for example, apply to capital losses made in connection with an investment by individuals into new non-quoted qualifying trading companies – broadly, those that would qualify for EIS relief. Currently, these capital losses can qualify for income tax relief under s132 ITA 2007.
Under these provisions and subject to existing anti-avoidance provisions, an investor is able to offset realised qualifying losses on such investments against income in the tax year in which the loss is incurred or in the tax year preceding that in which the loss is incurred.
For example, if a person invests £200,000 into a qualifying business that subsequently fails, they will be entitled to loss relief on the amount invested.
In effect, this means they can offset £200,000 of (capital) losses against £200,000 of income. On the assumption that they have £400,000 of income in that year, this would result in a tax saving of £100,000 (£200,000 @ 50%) in the current tax year.