Cap in hand

The 2012 Budget proposed that, with effect from 6 April 2013, the maximum amount of aggregated unrestricted reliefs that an individual can claim will be capped at the higher of £50,000 or 25% of their income. The stated policy aim for the cap is to "increase effective tax rates and help ensure that those with the highest incomes pay a fairer share". There will be a formal consultation over the summer, followed by draft legislation in the autumn/winter.

There will be a new definition of income to calculate the reliefs that an individual can claim.

What a relief – what is not caught?

  • Capped reliefs e.g. relief for subscriptions into EISs, SEIS and VCTs and relief for allowable contributions to pensions schemes.
  • Structural credits that acknowledge double taxation such as foreign and dividend tax credits and notional tax on life insurance gains.
  • Computational reliefs that determine only how income from a particular source is calculated, e.g. mortgage interest on a rented property, is unaffected.
  • Gift aid had been included in the original proposals, but it was removed following an announcement by the Chancellor at the end of May.
  • Carrying losses forward or back against profits of the same trade.
  • The new business investment incentive for UK resident non-UK domiciliaries.
  • Capital losses are unaffected by this proposal.

I can't relieve it – what is caught?

  • Trading losses from sole trades or an individual's share of partnership/LLP losses that are relieved 'sideways' against general income.
  • Losses on original subscriptions for shares in qualifying trading companies.
  • Qualifying interest including on a loan to fund buying shares in a trading close company or to fund a capital contribution to a trading partnership or LLP.
  • Tax-geared schemes, even ones predicated on statutory reliefs e.g. business property renovation allowance schemes.
  • Any other type of uncapped relief.
  • Losses arising on liquidation or sale of shares in an EIS. Currently the Treasury considers that such losses would be uncapped and therefore subject to the restrictions.

Comment

Taxpayers who make use of reliefs should review their affairs in advance of this new cap taking effect from 6 April 2013. Statutory targeted anti-avoidance to prevent perceived abuse in this area, e.g. the requirement for individuals to work at least ten hours a week in their unincorporated business to claim 'sideways' loss relief above £25,000, still remains.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.