Gabelle Tax Analysis: HM Treasury and HMRC issue an update note on the proposed cap on income tax reliefs

HM Treasury proposes a cap on income tax reliefs

The Chancellor announced in his recent Budget that from 6 April 2013 there will be limits to the amount of income tax relief individuals can claim.  Further information was published in a joint HM Treasury/HMRC update note on 5 April 2012.

Some reliefs are already subject to a cap, for example pension contributions and EIS, SEIS and VCT investments. These will not be affected by the new provisions, which only apply to reliefs that are currently unlimited, principally gift aid donations, relief for interest, and loss relief (where not otherwise restricted).

The proposal, subject to consultation, is that reliefs will be capped at 25% of income or £50,000, whichever is greater.

The consultation will look at how this impacts on charitable giving, and the most recent announcement highlights that the Government is “committed to exploring with the philanthropy and charity sectors ways to ensure that this change does not significantly impact on charities which depend on large donations.”  At the same time, it states that “the Government  believes it is not right that taxpayers with very high incomes should, year on year, pay little or no tax as a result of unlimited reliefs.”

Judging by recent press comment, and lobbying by large charities, this consultation process is likely to become emotive.

In order that the cap can work, particularly where pension contributions are involved, there will be a new definition of income for the purposes of calculating the available relief.  The announcement sets out the following example of how the relief will work:

“Consider an individual who has a total income of £250,000 under the new definition, who claims qualifying loan interest relief of £40,000 and relief for a donation of shares, valued at £25,000, to charity, and has invested £50,000 under the Enterprise Investment Scheme (EIS). As the total uncapped relief claim exceeds £50,000, a cap of 25% 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.”

What this shows is that out of total “relievable” amounts of £115,000, the total relief available to the individual will be £112,500.

Individuals that may be affected by these proposed changes should consider reorganising their affairs during the current tax year. They could consider accelerating donations, or where they have high business borrowings they could consider either repaying borrowings or refinancing within a company.

Paul Howard is a Director at Gabelle LLP. He can be contacted at paul.howard@gabelletax.com or via TaxDesk on 0845 4900 509.