Question: What will new tax relief rules mean for me?
Jayne Gibson FPFS, Chartered Financial Planner
Answer: The Government announced in the 2012 Budget Statement an overall cap on tax relief that can be claimed by an individual to be effective from April 2013. The main focus of the furore following this announcement was the impact this would have on charitable donations and the subsequent U-turn on this point.
The Government has now issued a consultation paper which outlines their proposals and details how they expect the new cap to be applied. Basically the cap on income tax reliefs that can be claimed in any one tax year will be limited to £50,000 or 25% of income whichever is greater. The cap will only apply to reliefs that are offset against general income and not currently capped. The one exception to this is of course charitable donations to registered charities.
The reliefs that would be affected by this cap include trade loss relief, early trade loss relief and post-cessation trade relief. Also affected is the relief available on the interest paid on certain loans, including those taken out to buy an interest in a partnership, or buying an interest in certain types of company and loans taken out by personal representatives to pay inheritance tax. The good news is that reliefs that are currently limited in their own right, such as pension contributions and subscriptions to Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCT) will not be included in this cap.
The new rules will impact on anyone who has set up a business and suffered losses in the early years. Currently these losses can be set against other income that the trader has to ease cashflow. The proposed cap will obviously restrict this. In addition where an ongoing business has trading losses, the amount that they will be able to set against other trading income for the year of loss will also be restricted.
The new rules could also impact on existing transactions, for example individuals who have already started trades and taken out loans may find that the relief that they can claim in 2013/14 may be restricted by the cap. This could place significant financial strain on these businesses.
Although these rules are not yet confirmed, previous practice over recent years shows that with such politically sensitive issues, the Government has pushed ahead with little or no revision to the proposals put forward. The consultation period does not end until October 5 and this leaves very little lead in time in which to make any adjustments or to take advantage of any available uncapped reliefs before April 6, 2013. It would therefore be prudent to take action now to assess the potential impact on individual and business revenues and consider potential contingencies plans to mitigate or minimise the potential financial fallout.