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New legislation limited to amount of income tax relief available from tax year 2013-14 onwards.

Finance Act 2013, Schedule 3 has introduced a limit to certain income tax reliefs available to reduce an individual’s adjusted total income for a tax year; these were previously unlimited.

The limit is set at the greater of £50,000 or 25% of the individual’s adjusted total income for a tax year. The new legislation has effect from the tax year 2013-14 onwards.

The limit applies to the following:

  • trade loss relief: available against general income for losses made by an individual carrying on a trade, profession or vocation (section 64 Income Tax Act 2007 (ITA))
  • early trade losses relief: available to an individual in the first four years of the trade, profession or vocation (section 72 ITA)
  • post cessation trade relief (section 96 ITA)
  • property loss relief against general income (section 120 ITA), including post cessation property relief (section 125 ITA)
  • employment loss relief (section 128 ITA) for former employees’ deductions for liabilities (section 555 Income Tax (Earnings and Pensions) Act 2003)
  • qualifying loan interest (chapter 1 Part 8 ITA)
  • share loss relief of certain qualifying shares (chapter 6 Part 4 ITA)
  • losses on deeply discounted securities (section 446-448 and section 453-456 Income Tax (Trading and Other Income) Act 2005).

The limit does not apply to a relief in the following circumstances:

  • to the extent that the relief is attributable to business renovation allowances
  • to deductions for trade or property loss relief (or post cessation trade or property relief) made from profits of the same trade or property business
  • to the extent that trade loss relief is attributable to the deduction of overlap relief
  • to deductions for share loss relief where the shares are qualifying shares for Enterprise Investment Scheme/Seed Enterprise Investment Scheme.

Adjusted total income is calculated as follows:

Step 1:

Take the amount of the taxpayer’s total income for the tax year. 

Step 2:

Add back the amounts of any deductions allowed under Part 12 of ITEPA 2003 (payroll giving) in calculating the taxpayer’s income which is charged to tax for the tax year.

Step 3:

If the taxpayer is given relief in accordance with section 192 of FA 2004 (pension schemes: relief at source) in respect of any contribution paid in the tax year under a pension scheme, deduct the gross amount of the contribution (the ‘gross’ amount of a contribution is the amount of the contribution before deduction of tax under section 192(1) of FA 2004).

Step 4:

If the taxpayer is entitled to a deduction for relief under section 193(4) or 194(1) of FA 2004 (pension schemes: excess relief under net payment arrangements or relief on making a claim) for the tax year, deduct the amount of the excess or contribution (as the case may be).

The amount arrived at as a result of following steps 1 to 4 is the taxpayer’s ‘adjusted total income for the tax year’.

If available loss reliefs exceed the limit, then consideration has to be given as to how to apply the reliefs. It is advisable to prioritise loan interest relief as this cannot be used in another year. The only time when excess loan interest may be carried forward to subsequent tax years as a trade loss, and offset against future profits of the same trade, is where the loan interest has been paid for the purposes of a partnership trade or profession.

Example 1:

Tom started his business as a florist on 6 April 2013. Due to an annual investment allowance claim, his first year loss is £100,000. Tom’s salary in the previous three tax years was as follows:

  • 2010/11 – £25,000
  • 2011/12 – £27,000 plus bonus £50,000: total £77,000
  • 2012/13 – £30,000.

Tom wants to carry back the loss under s.72 ITA 2007.

Under the new regime, the loss carry back is as follows:

  • 2010/11 £25,000 (as the available loss relief is the greater of £50,000 and £6,250 (25% of £25,000))
  • 2011/12 £50,000 (as the available loss relief is limited to £50,000, being the greater of £50,000 and £19,250 (25% of £77,000))
  • 2012/13 £25,000 (the loss remaining, following the claims above).

Under the old regime Tom would have been able to utilise the whole loss by 2011/12.

Example 2:

Paul has trade losses in 2014-15 of £300,000. Paul’s other income in the previous two tax years was as follows:

2013/14 profits from the same trade of £60,000, employment income £110,000

2014-15 employment income £110,000.

For 2013-14 loss relief against general income is capped at £50,000 (being the higher of £50,000 and £42,500 (25% of £170,000)); however, the loss carry back against profit of the same trade is uncapped. So Paul would be able to carry back £60,000 of 2014-15 and set it off against the profit of the same trade.

For 2014-15 loss relief against general income is capped at £50,000 (being the higher of £50,000 and £27,500 (25% of £110,000)).

Paul makes a claim to set £50,000 trade loss relief against his 2014-15 general income and to carry back £60,000 (uncapped, as it is relief against profit of the same trade) against 2013-14. He also claims £50,000 carried back against his general income in 2013-14.

Paul’s income chargeable to tax in 2013-14 and 2014-15 is as follows:

2013-14

Income – £170,000 (£60,000 + £110,000)

Less: 2014-15 trade loss relief against same trade (uncapped) – £60,000

Less: 2014-15 trade loss relief against other income (capped) – £50,000

Equals: Income chargeable to tax – £ 60,000

2014-15

Income – £110,000

Less: Sideways trade loss relief (capped) – £50,000

Equals: Income chargeable to tax – £60,000

Example 3:

Mary has losses from a property rental business of £175,000 in 2013-14, and £100,000 in 2014-15. Mary’s other income in 2013-14 and 2014-15 is £600,000.

Mary’s loss relief claims in 2013-14 and 2014-15 are as follows:

2013-14

Income – £600,000

Losses from property rental business – £175,000

Relief is capped at £150,000 (being the higher of £50,000 and £150,000 (25% of £600,000)).

Mary can relieve £150,000 of her property losses in 2013-14, leaving £25,000 unrelieved. As the provisions for property loss relief enable claims in the same or next tax year, she is able to offset (subject to how much 2014-15 cap she utilises) the remaining 2013-14 loss relief of £25,000 against her 2014-15 income.

2014-15

Income – £600,000

Losses from property business – £100,000

Relief against other income is capped at £150,000 (being the higher of £50,000 and £150,000 (25% of £600,000)).

Mary can fully claim loss relief of £100,000 arising from her property business in 2014-15 plus the loss carry forward from 2013-14, ie £25,000 against her general income, as together this total is less than £150,000 (25% of £600,000).

Article contributed by ACCA