The capital gains tax (CGT) payable on any taxable gain you make from selling residential property which does not qualify for principal private residence relief (PPRR) is 18% for basic rate taxpayers and 24% for higher rate taxpayers. This is very topical, given the expected increase in CGT rates in the forthcoming Budget.
Some EBA clients have already decided to offload properties prior to the Budget, to ‘lock in’ the current 18/24% rates. But what if you don’t have time before 30th April to make a sale? Is there anything you can do about it?
Yes, there is, and the mechanics are straightforward – although there are practical factors to consider.
By investing all or part of the gain made from selling a residential property in shares using the enterprise investment scheme (EIS), you can claim a deferral of the CGT until such time as you sell the EIS investment. That could be six months – or six years – later. The neat trick is that filtering the gain through the EIS changes its nature from a residential property gain to a normal gain, meaning that the standard rates of CGT (currently 10% and 20%) apply. What’s more, you can then use other tax planning strategies to reduce the gain further when it’s released (following the sale of your EIS investment). An example would be useful, so here goes.
Jim sells a buy-to-let property for £250,000, making a capital gain of £76,300. The first £3,000 is exempt from CGT (that’s his annual exemption), so he’ll be taxed on £73,300 at 24% – giving him a CGT bill of £17,592.
Now imagine that Jim had reinvested the gain in a qualifying EIS investment. Two months after selling his property, well within the required time limit to re-invest under EIS, Jim invests £73,300 in an EIS and thereby defers all of his taxable gain. Incidentally, had Jim bought the EIS shares at any time during the twelve months prior to selling his property or in the three years after selling it, he could have the purchase of the shares treated as a reinvestment.
A year later, he sells the investment and the deferred gain of £73,300 becomes taxable. As it’s a new tax year, Jim can again use his CGT exemption (assumed to still be £3,000) to further reduce the taxable gain to £70,300, on which the CGT rate is just 20%. His CGT bill is now only £14,060 instead of £17,592.
You might be thinking that the 20% rate mentioned above will be much higher after the Budget – and it may well be. But CGT rates tend to move around significantly over the years – they’re used like political pawns. The impact of deferring a gain this year by re-investing in EIS shares might be to ‘kick the can’ of paying CGT down the road to a time when the rate has come back down again.
EISs involve investing in small to medium-sized companies which are often high risk. Also, their availability is limited and they can be difficult to sell. However, if you’re willing to take the chance (you might even do well out of the investment), there are ways to reduce the risk and to find suitable companies to invest in.
Some investment brokers offer EIS portfolios. These spread your investment; this clearly reduces your risk and increases your chance of being able to sell the investment at a time to suit you. Alternatively, if you keep an EIS for at least three years you can claim a generous income tax credit in addition to the CGT advantage.