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Personal tax: Unlimited reliefs capped

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11th Dec 2012
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While it responded to criticisms from accountants in areas such as the controlling persons rules for IR35, the government pressed ahead with new limits on a collection of income tax reliefs in draft Finance Bill 2013 clauses published on Tuesday 11 December.

The legislation will enact the limits announced in the 2012 Budget of £50,000, or 25% of income - whichever is greater, starting from 6 April 2013. The Finance Bill 2013 overview document identified trade and property loss reliefs that can be relieved against general income and qualifying loan interest relief as the main victims.

The limit will not apply to relief offset against profits from the same trade or property business, but a number of other reliefs will also be affected (see box, right).

Capped reliefs

• Trade loss relief against general income, but not overlap relief and business premises renovation allowances (BPRA)

• Early trade losses relief for the first four years of trade

• Post-cessation trade relief

• Property loss relief against general income (excluding BPRA losses)

• Post-cessation property relief

• Employment loss relief

• Former employees deduction for liabilities

• Share loss relief on non-EIS/SEIS shares

• Losses on deeply discounted securities

• Qualifying loan interest

Following the controversies that surrounded the original announcement in March, the cap will not apply to charitable reliefs. PKF partner and AccountingWEB contributor Philip Fisher was one of many voices calling for relief on charitable contributions to left untouched.

The concession will be welcomed by the charity sector, but comes at a cost of further complications to an already challenging regime. The size of any cap above £50,000 will be based on an “adjusted total income” for the taxpayer’s total income liable to income tax, adjusted to reflect charitable donations via payroll giving and pension contributions. The adjusted figure and 25% or £50,000 limit will apply to the year of the claim and any earlier or later year in which the relief claimed is allocated against total income.

Among other adjustments following consultation, the government decided that share loss relief for shares qualifying for Enterprise Investment Schemes EIS and Seed Enterprise Investment Schemes would be excluded from the cap. Trade loss relief and early trade losses relief attributable to overlap relief were also excluded from the cap.

An individual’s income will be calculated for the purposes of the limit as the same for all affected individuals as their total income liable to income tax. This figure will then be adjusted to include an individual’s charitable donations made via payroll giving and to exclude pension contributions, to create a level playing field between those whose deductions are made before they pay income tax, and those whose deductions are made after tax. The result, ‘adjusted total income’, will be the measure of income for the limit. The limit will apply to the year of the claim and any earlier or later year in which the relief claimed is allocated against total income. The limit will not apply to relief offset against profits from the same trade or property business.

“Individuals will still have to set trading losses against earlier or later profits from the same trade,” explains the consultation response document (243kb PDF) published today. “The government’s intention is to apply the cap to reliefs that an individual is able to claim against their general income. It is not intended to cap reliefs used against profits in another year from the same business.”

The government maintained its stance that the changes would affect only around 8,000 high earners, with 90% of the extra money raised coming from those with incomes over £150,000.

But CIOT president Patrick Stevens remained unconvinced and warned that the relief cap is likely to undermine economic growth and employment.

“We appreciate that the Chancellor is keen to ensure that those on high incomes pay a significant amount of tax. However, the proposed cap goes well beyond that. It will affect some ordinary business scenarios that we really cannot imagine the government wants to catch,” he explained.

While welcoming the decision to exclude share loss relief for EIS and SEIS share schemes following consultation, Stevens added that it was “disappointing” the Treasury decided to ignore other suggestions to make the proposals more business friendly.

“Restricting the ability to offset genuine business losses and interest relief could suppress UK entrepreneurship. It is not uncommon to fragment business interests for commercial or regulatory purposes; the results are currently effectively aggregated for tax purposes and the person is taxed on the net income from all activities. The cap as drafted will prevent this happening in many cases, taxing many in business on more than they earn,” he said.

Other personal tax measures

Personal allowances and thresholds

As announced in the Autumn Statement, the 2013 Finance Bill will increase the basic rate limit to £32,010 and personal allowance to £9,440 in 2013-14. The higher rate threshold for income tax will increase 1% in 2014-15 to £41,865 and another 1% in 2015-16 to £42,285, bringing more people into the higher rate band as wage inflation creeps up by higher amounts.

The thresholds for the Capital gains tax annual exempt amount and Inheritance tax nil rate band will also be pegged to 1% increases in 2014-15 and 2015-16.

Legislation will also be introduced to make Universal Credit exempt from income tax.

Statutory residence test and non-dom rules

The long-awaited statutory residence test for individuals will come into force from 2013-14, but allow for taxation of certain income and gains during a period of temporary non-residence. The law will also allow a tax year to be split into a UK part and an overseas part in certain circumstances.

The concept of “ordinary residence” will be eliminated as far as possible, with overseas workday relief limited to a fixed period. This will affect users of the remittance basis who have been non-resident for three tax years and come to the UK while continuing to have some duties abroad.

Reform of non-dom taxation will progress as set out in the October document SP1/09, but HMRC has not completed its summary of responses to the consultation. Draft of the legislation and explanatory notes will be published in January 2013.

Further information on all of these personal tax issues can be found in the overview of draft legislation on the Treasury website, and in the personal tax section of HMRC’s Finance Bill 2013 page.

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