Partner Article

Lost in confusion

An apparently simple change to the tax system can cause complications and much confusion. A good example of this is restrictions introduced from the start of this tax year, limiting the losses which can be set against income.

The idea seems straightforward but, as HMRC’s recent guidance shows, it’s likely to cause headaches for individuals and financial advisers.

Broadly speaking, anyone with income of over £200,000 who has losses from trading activities, certain property rental activity, losses on the sale or devaluation of certain shares (typically, but not limited to those subscribed for under EIS) or qualifying loan interest, needs to carefully consider what they can claim, what order to do this, and the impact on pension contributions.

Prior to the 2013/14 tax year, it was possible to claim for any amount of losses arising in a particular tax year. It’s conceivable that in a particular year, losses might arise from trading activity, sale of EIS shares and interest that paid on a qualifying loan. The new restriction means that up to £50,000 of deduction can be claimed, unless the individual’s income is over £200,000, when they are then allowed to claim losses up to 25% of the income.

For this purpose, income is defined as the amount after pension contributions, but before charitable contributions. To get to that, it is important to look at pension contributions paid through payroll, net of tax to a personal pension or gross to a retirement annuity plan. For charitable donations, this means reviewing payroll giving, net payments through gift aid or gross gifts of land or shares.

Decisions will then need to be made about which to loss is most appropriate to claim in the year. Interest claims can only be made in the year, so perhaps should be claimed first, whereas trading losses can be carried forward. Some losses can be claimed against capital gains. Making a pension contribution will reduce the income for the 25% test – so for those more than £200,000 of income, pension advisers need to consider what claims for losses to make in the year, although that may not be known at the tax year end.

For non-UK domiciled clients, there is a calculation which is circular – HMRC says that after four iterations we can probably stop!

It’s hard to believe that in July 2010 the Government set up the ‘Office for Tax Simplification’ as we seem to be drifting further from that goal every year since.

This was posted in Bdaily's Members' News section by Baker Tilly .