If the cap fits? – further restrictions to loss reliefs

If the cap fits? – further restrictions to loss reliefs

As analysed in previous articles, a limit will apply to restrict the Income Tax relief available to individuals from 6 April 2013 to the greater of £50,000 or 25% of total income.  This legislation will affect some farmers and landowners, especially with the fluctuations in farming results expected in the 2012 and 2013 harvests.

The Finance Bill confirms that the draft legislation published last December following consultation earlier in 2012 will be enacted as proposed.

The example in HMRC’s summary of responses to the consultation will be appropriate for farmers who incur a farming loss in one year, due to the weather, and have sufficient farming profits in an earlier year.  It shows that “Henry”, who has trade losses in 2014/15 of £200,000 and 2013/14 profits from the same trade of £70,000, with other income in each year of £120,000, is able to use £170,000 of his loss (£50,000 trade loss relief against general income in both 2014/15 and 2013/14, plus carry back of £70,000 against 2013/14 profits from the same trade).  The balance of losses unrelieved will be available to carry forward against profits of the same trade.

The cap on loss reliefs does not apply to claims against the profits in another year from the same trade, only to the loss relief that an individual can claim against their general income.

These changes will therefore have a greater impact on farmers and landowners who diversify from the core farming trade and so may have early years of high costs and low income as new enterprises are started.  This is in addition to the existing restriction (for so called “non-active” individuals) to losses that applies when less than ten hours per week on average are spent on a trade.  It will therefore be worthwhile carefully considering whether the new enterprise is a separate trade for Income Tax purposes or just an expansion of the existing trade.

The new cap on loss reliefs is calculated including losses that are already restricted by the £25,000 cap on general loss relief for “non-active” individuals and qualifying loan interest (for example, where tax relief is available on interest paid on a loan to invest in a partnership or trading company).

The new cap will also apply where losses have been created by the Annual Investment Allowance which, following a reduction to £25,000 in April 2012, has increased to a generous £250,000 for two years from 1 January 2013.

The cap on loss relief will not apply to losses created by business premises renovation allowances and share loss relief for shares qualifying for EIS and SEIS.  Of more application to farmers, to the extent that the cap on loss relief is exceeded by a trading loss created by “overlap relief”, then the cap will not apply.  “Overlap relief” is a computational adjustment made when a business ceases or changes its year end, so this relaxation is to be welcomed.

The proposals only apply to individuals and will not apply to trusts.

Summary

Greater care will be needed to structure new business enterprises, so as to minimise any losses that might arise, for example by considering whether the interest on loans to finance the new enterprise can be deducted from an existing profitable business or whether the new enterprise is merely an extension of the existing trade.  It may also be appropriate to review partnership loss sharing arrangements in family businesses, so that losses above a certain level are spread between partners, rather than accruing to a single member.

Caroline Lovibond can be contacted on 01865 261100 and [email protected] about the contents of the above article.

10 April 2013