Finance Bill 2013 includes provisions to cap income tax reliefs from 6 April 2013.

Under the proposed legislation, certain income tax reliefs will be capped at the greater limit of £50,000 or 25% of the taxpayer’s “adjusted total income” for the tax year, meaning taxpayers with high income will be eligible for the highest relief.

The limit was meant to ensure that those on higher incomes cannot use reliefs excessively and whilst it was not intended to address tax avoidance, it will help to reduce the scope for certain reliefs where they are used for avoidance purposes. The original proposals included a cap on gift aid relief but this was withdrawn after a high profile campaign by charities and philanthropists.

A down side of the cap will mean that the restriction of relief for trade losses will impact directly on those small and medium sized businesses suffering a temporary blip in profits, for example, those trying to expand by investing and taking advantage of the £250,000 Annual Investment Allowance (“AIA”).

The proposals have been criticised as they do not distinguish between artificial manipulation of relief and genuine commercial claims for relief and whilst the increase in the AIA is meant to encourage investment, the denial of relief under the new capping may have the opposite effect. This illustrates the dichotomy between the AIA and the cap on income tax reliefs. The former is a tax incentive to encourage business growth and development whilst the latter restricts the tax relief and so is a disincentive.

The restrictions will apply to the following:

  • Trade loss relief;
  • Early trade losses relief;
  • Post cessation trade relief;
  • Property loss relief against general income;
  • Post cessation property relief;
  • Employment loss relief against general income;
  • Share loss relief;
  • Qualifying interest payments;
  • Deductions for liabilities relating to form employment; and
  • Losses on deeply discounted securities.

The restrictions are calculated after a deduction is made for pension contributions and so it will be important to take the new capping rules into account before deciding the level of pension contributions to make in any particular year.

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