22 November 2012

A range of tax reliefs available against income are to be brought under a cap from 6 April 2013. This may significantly limit tax savings for costs and losses. Action may be needed now in order to maximise tax savings.

Background

The UK tax system allows tax reliefs to be deducted in a variety of different ways, helping to reduce Income Tax charges. Currently many of these reliefs can be deducted in full against a person’s general income and are effectively limited only by that income. From 6 April 2013 it is proposed that the deduction for such reliefs will be capped at £50,000 or 25% of a person’s income in a tax year, whichever is greatest.

The top tax rate is also being reduced from 50% to 45% from 6 April 2013. Whilst this is welcome news, it does mean that some Income Tax reliefs are potentially more valuable to such taxpayers now than they will be next year. The capping proposals are not yet final and legislation is awaited. There is a window of opportunity before the capping regime commences on 6 April 2013; planning points are considered below.

Capped Income Tax reliefs

The main Income Tax reliefs which it is proposed will be within the ambit of capping are the following:

• Loan interest claimed against general income (e.g. certain loans to buy an interest in a close company, or to lend money to a business).
• Trade losses claimed against general income. (Carry forward of losses against profits from the same trade is not affected by the cap).
• Trade losses created by overlap relief on change of accounting date or cessation of trade, claimed against general income.
• Trade or property capital allowances, claimed against general income.
• Allowable agricultural expenses of a property business, claimed against general income.
• Losses on shares in unquoted trading companies acquired by subscription, claimed against general income (draft proposals would mean this includes EIS/SEIS shares).
• Claims for post-cessation expenditure claimed against income, relating to ceased trades and property businesses.

Uncapped Income Tax reliefs

Some Income Tax reliefs will not be within the scope of the proposed new capping rules and will remain available in full. These fall into various categories:

Computational reliefs
Deductions in calculating the taxable profits or losses of an activity are uncapped, however the use of any loss or allowance arising from that activity may be. For example, the relief allowing the deduction of expenses or capital allowances in calculating the profits or losses that have arisen from a trade or rental business will be uncapped. However the separate relief for setting trade losses or capital allowances against general income will be capped.

Structural reliefs
Tax credits on dividends and foreign tax credits will not be capped.

Reliefs subject to existing limits
Some Income Tax reliefs are already subject to limits and will not be affected by the proposed new cap, such as:

• EIS Income Tax relief at 30%
• SEIS Income Tax relief at 50%
• VCT Income tax relief at 30%
• Business Premises Renovation Allowance
• Pension contributions

Specific exemptions

• Charitable donations under Gift Aid, payroll giving, charitable gifts of land and shares
• Community Investment Tax Relief

Operation of the cap

Affected Income Tax reliefs are those arising after 5 April 2013 for tax purposes, and claimed against general income.

The cap is calculated from the income of the tax year against which relief is sought. Income will be defined for these purposes and is expected to be gross taxable income before these reliefs are deducted, less gross pension contributions.

Where an Income Tax relief arises in one tax year and is carried back to an earlier tax year, the relief in the carry back tax year will be capped even if it is prior to 6 April 2013.

Planning and action points

Some thoughts and considerations for affected taxpayers are as follows.

• Review all loans and consider whether they can be restructured so that relief for interest is given under computational rules (e.g. in arriving at profit from a trade or rental business).
• Restructuring may also gain tax relief for interest on loans where none currently exists.
• Increase trade losses by considering changing accounting dates, use of overlap relief, accelerating expenditure, delaying income.
• Review the timing of capital allowances claims, consider bringing forward capital expenditure on which capital allowances can be claimed.
• Consider the timing of any proposed business cessation, if trading losses are expected.
• Consider the timing of realisation of losses on unquoted trading company shares. Negligible value claims may be possible, or the loss may be crystallised on disposal.
• Careful planning is required to maximise Income Tax relief whilst not triggering Capital Gains Tax on previously deferred capital gains.

Conclusion

There is much that can be done to help soften the impact of the proposed new rules from 6 April 2013.
Planning undertaken should consider all aspects of an individual’s Income Tax position and planning in advance of the new rules is vital to maximise tax savings on anticipated costs and losses.

Contact Us

For more information and advice on the proposed cap on Income Tax reliefs and Income Tax planning in general, please contact us on 01788 539000.

About Us

Magma is a leading firm of Chartered Accountants and Chartered Tax Advisers, providing a wide range of professional advisory services to owner managed businesses and private individuals. Magma thrives on its work with entrepreneurial businesses and their people. Magma works closely with its clients, delivering proactive and innovative advice. Our focus is on building long term relationships with our clients to help them and their businesses succeed, reduce taxation and create, increase and protect wealth. Magma offers a breadth of technical expertise and specialist advisers across six integrated service areas: Audit and Assurance, Business Services, Corporate Finance, Corporate and Business Tax, Private Client Tax and Wealth Management.

This document has been prepared as a general summary. It has been written for information purposes, should not be relied upon and is not a substitute for professional advice which should be sought. This document does not constitute taxation, financial planning or investment advice. Neither Magma Chartered Accountants or any of its employees accept any responsibility for loss or damage incurred as a result of acting or refraining from acting upon anything contained in or omitted from this document. Magma Chartered Accountants is the trading name of Magma Audit LLP, a limited liability partnership (Registered in England No. OC370086). Magma Audit LLP is a subsidiary of Magma Partners LLP (Registered in England No. OC370051). The registered office of both LLPs is: Bloxam Court, Corporation Street, Rugby, CV21 2DU. Registered to carry on audit work and regulated for a range of investment business activities by the Institute of Chartered Accountants in England and Wales. Magma Partners LLP is registered with the Chartered Institute of Taxation as a firm of Chartered Tax Advisers. A list of members is available on request.