Finance Act 2013, Schedule 3 imposes a limit on the amount of ‘income tax reliefs’ that an individual may claim.
The limit applies to certain reliefs which, prior to 2013/14, had been unrestricted. The new restriction limits the tax relief available on the affected reliefs (which are considered below) to the greater of:
- 25% of the individual's adjusted total income (total income less pension contributions) for the tax year, and
- £50,000.
Reliefs which are subject to the restriction
The following list summarises the reliefs that are affected by the restriction:
- trading losses – relief against general income in the tax year of loss or preceding tax year under Income Tax Act (ITA) 2007, s.64;
- losses in early years of trade – relief for losses incurred in the first four years of trading against general income of the preceding three tax years under ITA 2007, s.72;
- post-cessation trade relief – available for qualifying losses within seven years of the permanent cessation of a trade under ITA 2007, s.96;
- interest on certain loans, including to buy an interest in an unquoted trading company or a trading partnership under ITA 2007, Chapter1, Part 8;
- property loss relief against general income and post-cessation property losses – available for losses generated by capital allowances under ITA 2007, s.120 and s.125 respectively;
- employment loss relief (generally due to excess claims under ITEPA 2003, s.336) and former employee’s deduction for liabilities under ITA 2007, s.128 and ITEPA 2003, s.555 respectively;
- share loss relief on losses subscribed for in an unquoted trading company or holding company of a trading group under ITA 2007, Chapter 6 Part 4. This excludes shares under the enterprise investment scheme (EIS) and the seed enterprise investment scheme (SEIS);
- losses on deep discount securities under Income Tax (Trading and Other Income) Act (ITTOIA) 2005.
It should be noted that the restriction does not apply to losses generated by the crystallisation of overlap relief.
It is also welcome news for charities that the government dropped its initial proposal to include charitable donations in the list of restricted reliefs.
A further important point to note is that where losses are being set off against capital gains, the restriction does not affect the amount of losses that may be set off against capital gains.
Combination of reliefs
Where a taxpayer has a number of reliefs that are subject to the restriction, the taxpayer may choose the order of set off, for example:
Luke has the following income for 2013-14:
£ | |
Income from membership in a trading LLP | 300,000 |
Dividends (net) | 45,000 |
Bank interest (net) | 16,000 |
He also has the following reliefs available: | |
Personal pension contributions (gross) | 50,000 |
Interest on loan to buy share in LLP | 60,000 |
Current year trading losses from self-employment | 30,000 |
His adjusted net income and available reliefs would be as follows:
£ | £ | |
Income from LLP | 300,000 | |
Dividends (£45,000 x 100/90) | 50,000 | |
Interest (£16,000 x 100/80) | 20,000 | |
Total income | -50,000 | |
Less: Pension contributions | ||
Adjusted net income | ||
Less: Reliefs subject to relief | ||
Interest on loan to buy share in LLP | 60,000 | |
Current year trading losses from self-employment | 30,000 | |
90,000 | ||
Restricted to greater of: | ||
£320,000 x 25% = | 80,000 | |
AND: | ||
£50,000 | 50,000 | |
-80,000 | ||
Taxable income before personal allowance | £240,000 |
The taxpayer may choose to use the loan interest first, as this cannot be carried forward to a later year and carry forward the trading losses against future profits from the same trade.
Transitional rules
The new rules apply for tax years commencing 6 April 2013 onwards. However, transitional rules apply for losses arising after that date which are carried back to the 2012/13 tax years or earlier. If losses are being carried back, eg losses in early years of trade, in these circumstances, then the restriction will apply.
Remittance basis taxpayers
The position becomes more complicated when looking at UK resident, non-domiciled taxpayers who are subject to the remittance basis and subject to the £30,000 or £50,000 remittance basis charge.
If there is insufficient UK and nominated foreign income available to cover the available reliefs, a further amount of foreign income is deemed to be added to give a tax increase equal to the remittance basis charge. This is best illustrated by way of an example:
Jemima has UK income of:
£2,000,000
and is claiming reliefs subject to the restriction of:
£600,000
Jemima claims the remittance basis and pays the remittance basis levy:
£30,000
Based on her UK income, without the deemed addition, the reliefs would be restricted to:
£2,000,000 x 25% = £500,000
Her income subject to tax would be:
£1,500,000
As there are surplus reliefs available, it is necessary to add an amount of deemed income in order to ascertain the amount of reliefs that may be used, as follows:
Remittance basis charge £30,000 grossed up at marginal rate of tax:
£30,000 x 100/45 = £66,667
The amount of adjusted net income on which the restricted reliefs will be based is therefore:
£2,000,000 + £66,667 = £2,066,667
Jemima’s restricted reliefs are therefore:
£2,066,667 x 25% = £516,667
rather than £500,000.
Conclusion
The restriction of reliefs is something that will need to be borne in mind from 2013/14 onwards. However, due to the way in which the restriction operates, the legislation is intended to catch abusive use of reliefs by higher earners.