A joint HMRC/HM Treasury press release has now provided more, but still limited, detail on the announcement at Budget 2012 that a cap is to be placed on unlimited tax reliefs. The proposal is to set the cap at £50,000 or 25% of income.

The Budget contained very little information about the proposal but more information was provided in the press release. However details still remain scant and it's unlikely that more will be available until the consultation document is launched, probably in the summer.

The cap is proposed to take effect from 6 April 2013 and will apply specifically to income tax and to individuals. The principal reliefs affected are loss reliefs that can be claimed against total income, qualifying loan interest relief and reliefs for charitable giving. A number of smaller reliefs which are currently uncapped will also be affected.

The Press release confirmed that the following will not be affected:

• Reliefs for double taxation such as foreign and dividend tax credits and notional tax on life insurance gains.
• Reliefs that are already capped such as pension tax relief, front-end Enterprise and Seed Enterprise Investment Scheme income tax relief, Venture Capital Trusts and the Cultural Gift Scheme.
• Computational reliefs which determine only how income from a particular source is calculated.
• The new business investment incentive for resident non-domiciled individuals (as this does not apply as a relief against total income but relieves income that would not otherwise be brought to the UK and so would not be taxable here anyway).

It is intended that the Government will consult with the charitable sector to ensure that the changes do not significantly impact on charities dependant on large donations.

A number of questions therefore remain unanswered at this point and it is worrying that this proposal may deny tax relief for quite genuine commercial or charitable transactions. The information available so far does raise a number of questions about the practicalities of how the cap will work. One overriding concern is what will happen to reliefs in excess of the cap. Can they be carried forward or are they lost? The recent press release does say that “other avenues of relief, such as carrying losses forwards or back against profits of the same trade are not affected”, but does not enlarge on exactly what this means.

The press release is available at http://www.hm-treasury.gov.uk/d/cap_unlimited_it_reliefs.pdf and is reproduced in full on here