Income tax relief cap
Over many years, tax avoidance schemes have utilised the facility to offset various genuine tax reliefs against general or other income. For many years, this was addressed by means of a game of cat and mouse where HMRC closed one door, only for the avoidance industry to notice that the window had been left wide open.
However, enough was enough and with effect from 6 April 2013 a new cap or restriction was introduced where before there had been none.
This new income tax relief cap is set as the higher of:
- £50,000, or
- 25% of adjusted net income
What losses and reliefs does the income tax relief cap affect?
The income tax relief cap may apply to:
- Trading loss relief v general income;
- Trading losses arising in the first 4 years of the trade /profession / vocation;
- Post-cessation trade relief that is available for qualifying payments / qualifying events taking place within 7 years of the cessation of the trade;
- Property loss relief against general income where loss arises from capital allowances or agricultural expenses;
- Post-cessation property relief: that is available for qualifying payments / qualifying events taking place within 7 years of the cessation of the UK property business;
- Interest relief for Qualifying Loans – for example, interest paid on loans taken out to acquire an interest in certain types of company or partnership;
- Relief for loss on EIS / Seed EIS Share;
- Employment loss relief;
Income tax relief cap – what’s outside the cap?
The income tax relief cap does not apply to the following tax reliefs:
- Donations made under Gift Aid;
- Relief qualifying under the Business Premises Renovation Allowance (“BPRA”) scheme;
- Loss relief carried forward or back against profits of the same trade.
- Overlap relief.
- Loss relief on shares that qualified under the EIS or Seed EIS schemes.
25% of Adjusted Net income – What is ‘Adjusted Net Income’?
This figure is essentially an individual’s total income that is subject to income tax. This figure is then adjusted by adding any donations to charity that he or she has made through payroll plus a deduction for pension contributions they have made.
This limit applies for:
- the year the claim is being made; and
- any earlier / later year for which the relief is being offset against total income.
Income tax relief cap – effect on other tax rules
- The limit will apply in addition to any other provisions that restrict relief;
- Claiming capital allowances (eg under the Annual Investment Allowance) may create take a person in to a trading loss position. However, one should take care that this loss relief is not restricted by the cap;
- Capital losses on disposal of shares and negligible value claims. An individual may make claim for loss relief against income tax loss on sale where he or she subscribed for these shares in cash. Similarly, loss relief will also be available where there is a negligible value claim rather than a disposal. In which case the cap on income tax relief may block part of the shareholders’ loss claim.
Income tax relief cap – conclusion
As such, one needs to take care that, even where one knows that a relief is available in principle, the cap on income tax reliefs does not come to take part of the relief away.
If you or your clients have any queries regarding the income tax relief cap or loss relief in general then please get in touch.