Limit on Income Tax reliefs

Transcription

1 Helpsheet 204 Tax year 6 April 2013 to 5 April 2014 Limit on Income Tax reliefs A Contacts Please phone: the number printed on page TR 1 of your tax return the SA Helpline on the SA Orderline on for helpsheets or go to hmrc.gov.uk/sa This helpsheet explains the limit for and later years, for individuals claiming certain Income Tax reliefs. It will help you understand how the limit on reliefs works, and so complete your Self Assessment return. Background What is the limit on Income Tax reliefs? From 6 April 2013 the total amount of certain Income Tax reliefs that can be used to reduce your total taxable income is limited to 50,000, or 25% of your adjusted total income (this is explained below), if higher. The limit applies to the aggregate of the relevant reliefs claimed for a tax year, and is calculated separately for each tax year in which a relief is given effect. This limit applies in addition to other provisions that restrict the amount of relief that can be used to reduce your total taxable income for the year. How the limit works What reliefs are limited? The main reliefs subject to this limit are: Trade Loss Relief against general income and Early Trade Losses Relief claimed on the Self-employment, Lloyd s underwriters or Partnership pages Property Loss Relief (relating to capital allowances or agricultural expenses) claimed on the UK property or Foreign pages Post-cessation Trade Relief, Post-cessation Property Relief, Employment Loss Relief, Former Employees Deduction for Liabilities, Losses on Deeply Discounted Securities and strips of government securities claimed on the Additional information pages Share Loss Relief, unless claimed on Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS) shares claimed on the Capital gains summary pages Qualifying Loan Interest claimed on the Additional information pages. If you have claimed any of the above reliefs against your general income and the total amount exceeds 50,000, then you could be affected by the limit. The amount of relief that can be set against total income, in the following boxes, may be restricted: SA103S Self-employment (short) pages boxes 33 and 34 SA103F Self-employment (full) pages boxes 78 and 79 SA103L Lloyd s underwriters pages box 56 SA104S Partnership (short) pages boxes 22 and 23 SA104F Partnership (full) pages boxes 22 and 23 and box 39 SA105 UK property pages box 42 SA106 Foreign pages box 31 SA101 Additional information pages Other tax reliefs boxes 5 and 6 SA108 Capital gains summary pages box 12 and box 14. HS Page 1 HMRC 12/13

2 The following example illustrates how the limit is calculated. Example 1 Phil has a total income of 70,000 in and makes a trading loss in that year on one of his businesses of 60,000. The maximum amount of relief Phil can set against his total income for is 50,000 as this is the greater of 50,000 and 25 per cent of his income. The remaining 10,000 loss can be carried forward. Order of relief The limit applies to the total of reliefs and loan interest payments in the tax year. Where there are multiple relief claims you will need to decide which reliefs to set against income in a tax year, and which to carry forward or back, as appropriate. Example 2 Joan has a total income of 170,000 in She has a property loss, relating to capital allowances of 75,000 and a business trading loss of 85,000 (total losses 150,000). Because of the limit, only 50,000 of Joan s losses (this is the greater of 50,000 and 25 per cent of her income) can be set against her income of As Joan s losses exceed her limit, and as it is more likely that her property business will make a profit the following year, she chooses to carry forward the full 75,000 property losses. She can set 50,000 of the business trading losses against her income in the tax year with the remaining 35,000 losses being carried forward to the following year. Where the total of losses and loan interest payments exceeds the limit, it can be beneficial to have the maximum possible loan interest payments set against income in the given tax year. This is because these payments cannot be carried forward or back and they would otherwise be lost. Example 3 Paul has a total income of 90,000. His share of partnership trading losses is 49,000. He has also paid 6,000 interest on a business loan. Only 50,000 of his combined losses and loan interest can be used to reduce his taxable income. Paul therefore specifies that the full 6,000 loan interest is to be relieved first. Only 44,000 of his partnership trading loss is then used. The remaining 5,000 of these losses is carried forward to set against partnership profits. Had he specified that the 49,000 partnership trading losses is relieved first he could only have used 1,000 of the loan interest and the balance would have been lost. Page 2

3 There are circumstances where excess loan interest, which has been paid for the purposes of a partnership trade or profession cannot be relieved because it exceeds the individual s income for the year. This may be carried forward to subsequent tax years as a trade loss and offset against future profits of the same trade. However, where Loan Interest Relief cannot fully be given because of the limit on reliefs, it cannot be carried forward as a trade loss. Exceptions to the limit The limit does not affect the amount of trading losses which may be claimed against capital gains. Certain reliefs are not subject to the limit on Income Tax reliefs. Trade or Property Loss Relief that is attributable to Business Premises Renovation Relief claimed on SA103F Self-employment (full) pages box 54 SA104S Partnership (short) pages box 15 SA104F Partnership (full) pages box 15 SA105 UK property pages box 33. Overlap Relief claimed on SA103F Self-employment (full) pages box 69 SA104S Partnership (short) pages box 13 SA104F Partnership (full) pages box 13. Trading losses used against profits of the same trade. Property losses used against profits of the same property business. Share Loss Relief on Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) shares claimed on SA108 Capital gains summary pages box 13 and box 15. Example 4 In Marge has a total income of 72,000 and a loss of 60,000 on property she is letting out (entered in box 41 of the UK property pages), all of which relates to capital allowances, including Business Premises Renovation Allowances (BPRA). Marge claims BPRA of 4,000 (in box 33). 4,000 of the 60,000 losses can be attributed to BPRA and are not subject to the limit. Relief for the remaining 56,000 losses ( 60,000 minus 4,000) is restricted to 50,000, as this is the greater of 50,000 and 25 per cent of her income. The maximum losses Marge can set against her total income is 54,000 ( 4,000 plus 50,000). She claims these in box 42 of the UK property pages, and the remaining 6,000 losses are carried forwarded to be used against future year s profits (in box 43 of the UK property pages). Page 3

4 Adjusted total income What is my adjusted total income? Generally, you only need to work out your adjusted total income if your total income is over 200,000. If your total income is below 200,000 the limit on Income Tax reliefs will always be 50,000. Working Sheet 1 Use this Working Sheet to calculate and confirm your adjusted total income and revised limit. Total income for the year Amount of payroll giving SA110 Notes, Tax calculation summary notes, box A59 A SA101 Additional information pages, page Ai 3, (Income Tax losses and Limit on Income Tax relief), box 6 B Box A + box B C Pension contributions SA100 Tax Return, page TR 4 (Tax reliefs) boxes D Adjusted total income Box C minus box D E Box E x 25% F Revised limit on Income Tax reliefs Higher of box F and 50,000 G Remittance Basis Charge Where the Remittance Basis Charge (RBC) applies to someone resident but not domiciled in the United Kingdom (UK) (see SA109 Notes Residence, remittance basis etc. notes) you should add your nominated foreign income into your total income for the year. Working out the revised limit on Income Tax reliefs is a bit more complicated as any increase in the limit may require more income to be nominated to produce the correct RBC. In turn this could increase the limit on Income Tax reliefs and so require more income to be nominated. Your tax adviser should be able to assist you with this calculation. Transitional years Some trading losses can be carried back and set off against the income of an earlier year other than the year of loss (see Helpsheet 227 Losses). Relief for trading losses made in years prior to are not subject to the limit. But if trading losses of , or a later year, are carried back to a year before , the limit does apply and is calculated using the adjusted total income of that earlier year. Property Loss Relief against total income can be given in the loss-making year or the subsequent year. If a property loss is claimed against total income of the tax year, the limit will not apply as the loss is a loss; but a loss set against income will be subject to the limit. The limit applies even if the relevant financial arrangements were entered into before the introduction of the relief limit. Page 4

5 Working Sheet 2 Use this Working Sheet to help you keep track of your losses and how they can be allocated. Column A Column B Column C Column D Column F Column G Column H Name of business Amount of Amount in Amount from Limit on relief Restricted Total losses Amount of losses that column B column B that restrictions of amount of that can be losses to qualify to that is not is subject to 50,000 or losses that can set against be carried be set off subject to restriction. box G be set against income. forward. against restriction (Column B from Working income. (Column C (Column B income minus Sheet 1, (Smaller of plus minus column C) if higher column D or column G) column E) Remaining limit on relief restrictions (previous column E minus previous Remaining limit on relief restrictions (previous column E minus previous These notes are for guidance only and reflect the position at the time of writing. They do not affect the right of appeal. Page 5