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Introduction »
Restricting reliefs
Budget 2012 announced the intention that, from 6 April 2013, there will be limits to the amount of income tax relief that individuals can claim.
This is driven by the fact that, currently individuals can relieve their entire income through the use of income tax reliefs and as a result pay no income tax at all. From a common sense view point this does beg the question as to how they manage to live at all but that is a separate matter. From a Government perspective the concern is only to ensure that those with high incomes pay their share of tax as stated below:
‘However, some individuals on very high incomes have used reliefs to pay little or no tax, sometimes year after year. This 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.
Other countries already restrict tax reliefs. For example the US caps the income tax relief available for charitable donations, and there is a presumption that all taxpayers should contribute to Government costs. In the US, it is not possible to reduce income tax bills to zero by making donations to charity, as is currently possible in the UK.’
The outline proposal
The proposed cap is the greater of 25% of income or £50,000. It is only set to apply to reliefs which are currently unlimited. The principal reliefs affected would seem to include:
- loss reliefs that can be claimed against total income
- qualifying loan interest relief and
- reliefs for charitable giving.
Example
This means that for 2013/14 onwards an individual with an income of £280,000 would only be able to offset £70,000 against their income, either through giving to charity or through some other relief such as business losses, up to that amount. The maximum tax saving in such a situation would, for an additional rate taxpayer for 2013/14, be at the rate of 45%.
In 2012/13 and earlier tax years any such reliefs would have been available to reduce income potentially to nil or at least by such an amount as to avoid the current additional rate tax of 50%. In this example, it would mean that £130,000 could be used to reduce taxable income to £150,000 so that only basic and higher rate tax was due.
Reliefs that are already capped such as pension contributions, Enterprise and Seed Enterprise Investment Scheme (EIS) income tax relief, Venture Capital Trusts and the Cultural Gifts Scheme are not affected. This does provide some potential alternatives for the high income individual to consider.
So, returning to the example above for 2013/14, the individual will be able to obtain further IT relief where for example, a qualifying investment was made in an EIS company, as this relief is already capped and should not be affected by the new proposals.
Impact on charities
There is clearly concern about the impact these proposals will have on charities. In response to this the Government has stated that:
‘it 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.’
The cap will not, however, impact on the tax reclaimed by charities under the Gift Aid scheme. However, the grossed up donation (that is the donation made by the donor plus the tax reclaimed by charities) will be taken into account when assessing whether an individual donor has reached the cap.
Example
An individual with income of £500,000 makes a net donation of £120,000 to charity. The gross donation is £150,000 once the 20% basic rate tax of £30,000 is added. The charity will be entitled to receive the £30,000 basic rate tax in full from HMRC. However, the individual will only get tax relief on £125,000 (£500,000 x 25%) of the £150,000 under the proposals.
What next?
Some planning may be necessary for affected individuals before 2013/14 particularly if tax relief of 50% is currently available before:
- the additional rate reduces to 45% and
- the affected reliefs are capped.
Further details of how the cap will be implemented are expected when the consultation document is issued. We will keep you informed of developments but please do contact us if you consider this will impact upon you, so that any relevant action points can be explored.
Introduction »
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