Unlock your overlap relief?

Since the introduction of the 50% Additional Rate of income tax, there has been much greater discussion about unlocking relief but we know from discussions with clients that there is uncertainty about what this means.

Overlap profits are the profits that were taxed twice in your early years of self employment or partnership in your firm - unless your firm’s year end is 31 March (actually between 31 March and 5 April), you will have them, meaning that you have cash on deposit with the Treasury.

In these straitened times most would like to release this cash, particularly as the tax was probably paid at 40% and could be returned at 50% Typically, overlap relief is given when you retire from your firm – the overlap profits reduce your profits for your final year, so that you get your money back. Not much opportunity here, unless you are planning your retirement.

However, overlap relief is also given on a change of year end and this is the issue at the heart of these discussions.

A change of year end to 31 March will give you full overlap relief, so why hasn’t everybody done it?

• It may not be possible – if your business has changed year end in any of the past five tax years you cannot make a change.

• The change will bring profits forward, so, if your profits are rising, this might be expensive.

• Your overlap profits may be less than current profits, in which case you are likely to increase your immediate tax liability.

• Different partners will have different profit profiles – older partners may have ‘banked’ their overlap profits at much lower levels than younger partners.

Overlap profits feel like a very poor investment and our currently higher tax rates create an impression that releasing that investment would be beneficial, but a careful analysis is needed to make sure that the release does not cost more than it saves.

We monitor our clients’ overlap position and raise the matter when we consider it appropriate, but please contact us if you would like to discuss your position.