Relevant to tax year 2017/18
By Simon Misiewicz
Are you looking to sell a buy to let property investment?
Are you worried about the Capital Gains Tax (CGT) bill you’re likely to face? Paying CGT has a negative impact on your cash flow and may even change your decision as to whether or not you wish to sell the property at all.
Let’s say you’re thinking about selling a property investment that is now valued at £100,000 more than the price you originally paid for it. This is how your CGT will be worked out:
- £100,000 capital gain (profit on selling a property)
- -£11,300 CGT allowance
- £88,700 capital gain subject to CGT
- £24,836 – 28% CGT liability (assuming an individual is a higher rate taxpayer).
Basic rate taxpayers will pay 18% up to the higher rate tax band.
Enterprise Investment Schemes (EIS) and tax relief
One way to avoid giving almost 25% of the money you’ve made to HMRC is by investing in Enterprise Investment Scheme (EIS) investments, which will provide you with tax relief. The Enterprise Investment Scheme (EIS) is aimed at helping smaller trading companies raise finance by offering a range of tax reliefs to investors purchasing new shares in those companies.
Of course there is some risk involved in EIS investing, but if you are using it to mitigate CGT rather than gain a return on investment it would make sense to choose something low risk, with a typical yield of about 1-2%, rather than opt for something higher risk in the hope of a higher return on investment.
The real gain you’ll make is on the tax relief you can obtain, which is 30% of the investment that you make into the EIS. If you invested the entire £100,000 from the above example, then you can get tax relief of 30%.
As a bonus, the payment of tax on a capital gain can be deferred where the gain is invested in shares of an EIS-qualifying company. The gain can arise from the disposal of any kind of asset, but the investment must be made within the period one year before or three years after the gain arose. You could then sell your EIS investment in stages to make use of your yearly capital gains tax allowance — sell just £10,000 in each year and you’ll stay under the £11,300 allowance.
You can also claim income tax relief from the previous year if you have invested in EIS.
To qualify for the EIS tax relief you must ensure that:
- The company is able to accept your investment
- Shares must be full-risk ordinary shares, and may not be redeemable or carry preferential rights to the company’s assets in the event of a winding up
- The shares may not be acquired using a loan made available on terms which would not have applied other than in connection with the acquisition of the shares in question
- The shares must not be issued under any ‘reciprocal’ arrangements, where company owners agree to invest in each other’s companies in order to obtain tax relief
- Income tax relief can only be claimed by individuals who are not ‘connected’ with the company (non directors/shareholders)
- Companies must have fewer than 250 full-time employees (or their equivalents) at the time the shares are issued
- Companies are not allowed to raise more than £5 million in total in any 12-month period from the venture capital schemes
- The company to be invested in must carry out a trade, not an investment (shares, land, property development, hotels, guest houses, nursing or care homes)
The EIS shares you subscribe for must be issued to you in the period beginning 12 months before, and ending 36 months after, the date of the disposal for which you wish to claim relief. HMRC has discretion to extend these time limits and can explain the circumstances in which they will do this.
You should speak to and clarify the above points with an IFA and make sure you are comfortable with the risks involved in any EIS you are considering.
Practical steps you should now take to invest in EIS and get your tax relief
It is one thing to understand the theory but it is another to put it into practice. Follow these basic steps to implement this strategy:
- Identify an IFA to work with
- Work with the IFA to identify the investment
- Invest the capital gain into the EIS
- Complete the relevant forms with the IFA to get the tax relief
- Ensure that you complete the relevant sections on your self assessment EIS relief to claim the relief
There are other ways in which you can minimise your CGT liability by reading our other articles:
If you want to understand how to implement this strategy or to discuss other finance/tax questions then please book some time with us using the below calendar:
If you are looking for a new accountant then please book some time with us using the below calendar. Please note that this booking is to describe our services and will not be used to discuss your personal tax affairs.