The draft Finance Bill clauses in relation to the proposed cap on income tax relief were published on 11 December. The cap sets a limit on income tax reliefs claimed by individuals and takes effect from 6 April 2013.
The limit will apply to certain reliefs that are currently unlimited, and will be set at the greater of £50,000 or 25% of income.
When will the cap apply?
The restriction will apply to the following reliefs:
- Sideways relief for trading losses (excluding overlap relief and business premises renovation allowances);
- Post cessation trade relief, which is available for certain payments made within seven years of the permanent cessation of the trade;
- Property loss relief, which is available for property business losses arising from capital allowances or agricultural expenses;
- Employment loss relief, which is available in certain circumstances where losses or liabilities arise from employment;
- Share loss relief under s 131 ITA 2007, which applies to losses on shares in certain trading companies;
- Losses on deeply discounted securities arising on losses on gilt strips and listed securities held since 26 March 2003;
- Qualifying loan interest available for interest paid on qualifying loans including loans to buy shares in trading companies or to invest in a partnership.
Are any reliefs safe outside the scope of this new cap?
The limit will not apply to charitable reliefs, which will continue to be unlimited.
Certain reliefs already have their own cap, and these will be unaffected by these new provisions. These include:
- Pension contributions
- Subscription for shares in EIS or SEIS companies
There is also no limit on relief for trading or property business losses which are carried forward and set off against future profits from the same trade or business.
Why does this matter?
The purpose of these provisions is to prevent an individual from completely eliminating their income tax liability by the use of reliefs. This will primarily affect relief from trading losses and from qualifying loan interest.
These rules are likely to have a significant effect on entrepreneurial activity. In particular, the structure of business financing will have to be considered very carefully, and there is likely to be a shift from personal financing to direct borrowing by the business entity, especially if interest rates start to increase.
Where trading losses are capped under these provisions, the losses can be carried forward and set off against future profits from the same trade. However, this could impact on the commercial viability of some ventures, where the backers look at income tax relief to measure the return on investment.