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How to reduce CGT due by 8%

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12th Aug 2016
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Capital gains made by individuals on residential properties are taxed at 28% or 18%, but there is a way to reduce the CGT rate to 20% or 10%.

Higher rates retained

Many landlords were annoyed that when the general rate of CGT was reduced to 20% (10% for basic rate taxpayers) on 6 April 2016, the higher rates of 28% and 18% were retained for gains made on the disposal of residential properties. This was seen as another blow for private landlords on top of the interest restrictions which will create huge tax bills for some from 2017/18, as I explained in October 2015.

As I suggested in that article, many landlords will want to restructure their property portfolios to reduce their borrowings, or incorporate their let property business. Either of those actions may generate capital gains taxable at 28%. Incorporation relief may be available to roll-over the gains made, where an actively-managed property portfolio is transferred to a company.

Invest to save

If the taxpayer is prepared to reinvest his gain for a short period, he can reduce the rate of CGT payable from 28% to 20%. This is done by subscribing for shares issued under the enterprise investment scheme (EIS) and claiming deferral relief for that gain. The taxpayer is not required to hold the EIS shares for a minimum period to achieve the capital gains deferral. Where EIS income tax relief at 30% is also required, the EIS shares must be held for at least three years.

There is no limit on the amount of gain which an individual can reinvest in EIS shares in a particular tax year, or even over the taxpayer’s lifetime. However, only EIS investments of up to £1m per tax year will qualify for income tax relief.

The taxpayer should take advice from a qualified IFA before making any EIS investment, as the companies which are permitted to issue EIS shares are by their nature relatively young and risky. The IFA may advise that a significant gain is spread over a number of different EIS companies.      

Gain becomes taxable

When the EIS shares are disposed of the deferred gain becomes taxable at the general rates of CGT applicable in the year of that disposal. As it is the gain which is deferred, not the disposal of the residential property, the deferred gain is charged to CGT at the general rates of 20%, 10% for basic rate taxpayers, not at the rates applicable to gains from residential properties of 28% or 18%. This gives the investor the potential 8% tax saving.

Conditions

The EIS shares must be subscribed for in a four-year window which starts 12 months before the date on which gain is made, and ends to 36 months after that date. Thus EIS shares acquired within the last year could be used to defer gains made today.

Claim the relief

The taxpayer must report the gain arising from the disposal of his residential property on his self-assessment tax return by 31 January following the end of the tax year which the disposal was made. The CGT due will also be payable by this date if a valid claim for EIS deferral relief has not been made.

A potential snag is that taxpayer must wait for the EIS company to issue an EIS3 certificate before he can claim either EIS income tax relief or capital gains deferral relief. This can take four to six months, or sometimes longer, after the date of investment. The CGT due can’t be postponed pending an EIS claim.

When the EIS3 certificate arrives the tax return can be amended, and a repayment of the CGT paid should be claimed.

Don’t use SEIS

The junior version of EIS: seed enterprise investment scheme (SEIS) doesn’t provide the same deferral of capital gains as EIS.

The reinvestment of a gain in SEIS shares will allow the investor to claim an exemption from CGT for half the gain invested, but only if the SEIS shares are held for at least three years. The taxpayer is also limited acquiring up to £100,000 worth of SEIS shares in one tax year. 

Replies (11)

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By Duncan Cameron
12th Aug 2016 18:40

“How to reduce CGT due by 8%” should read “How to reduce CGT due by 8 percentage points” or better still "How to reduce CGT by up to 44.4%".

A reduction from 28% to 20% is a reduction of 29% roughly and a reduction from 18% to 10% is a ‘saving’ of over 44%. I mean, if you say to client if you do X it will save you 8% tax he might not think that the risk of doing X is worthwhile. If you tell him it will save 28% or 44% he might be more interested.

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By kaff
14th Aug 2016 09:11

I'd have thought para 1(2)(d) of Sch 5B TCGA might cause difficulties?

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Replying to kaff:
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By Justin Bryant
15th Aug 2016 11:58

If that were a problem then you would never get EIS relief (i.e. that anti-avoidance provision cannot be that wide - see Lloyds Leasing case re main purpose test). The article mentions and then fails to expand on potentially achieving 20% CGT after an incorporation of a BTL portfolio by gifting shares rather than gifting the properties (without an incorporation).

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Replying to Justin Bryant:
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By Justin Bryant
23rd Aug 2016 13:59

'The reduction of an investor's tax liability which flows from the schemes in the circumstances intended by Parliament is obviously not a tax advantage at which this rule is aimed. We therefore do not have to judge whether a subscription for eligible shares would have been made if it had not attracted relief"
https://www.gov.uk/hmrc-internal-manuals/venture-capital-schemes-manual/...

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By Ian McTernan CTA
15th Aug 2016 12:11

Terrible advice. Take your money out of a relatively stable investment (property) and put it in the riskiest asset class of all (EIS) all to try and save 8% tax.

Not to mention most EIS shares aren't traded on a market, and the reason they are EIS is that there is a significant risk you won't get anything back at all.

Also, as I'm not an IFA I couldn't give this advice anyway, and any IFA who gave this sort of advice wouldn't be on my contacts list.

Take the 8% hit and be free to place the capital where you want it, and be able to access it when you want it, rather than risk losing lots of it or be tied in to investments with no market.

This might be appropriate for some small proportion of the gain so actual savings will be no where near 8%.

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Replying to Ian McTernan CTA:
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By Justin Bryant
15th Aug 2016 13:38

But the advice to potentially save 8% CGT via an incorporation (e.g. if doing IHT PET planning) is potentially good.

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By lme
15th Aug 2016 13:04

More brilliant insights thanks Rebecca

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7om
By Tom 7000
15th Aug 2016 13:23

Good luck with EIS paying out in the future

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By RichBatoul
15th Aug 2016 14:57

“The government is committed to reducing burdens for taxpayers and building a transparent and accessible tax system fit for the digital age… HMRC will collect and process information affecting tax in as close to real time as possible, stopping tax due or repayments owed from building up.

Try telling this to all the construction industry businesses still waiting for refunds of CIS suffered in excess of CIS and PAYE due. HMRC have not been able to sort out PAYE/CIS overpayments under RTI yet. When was RTI introduced? So they now think MTD will solve all our problems?

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By louisVW4
18th Aug 2016 13:01

A potentially interesting article Rebecca.

I disposed of a rental property last year, and must disclose a significant gain on my 2015/16 tax return for CGT purposes.

Putting aside the risk of EIS' for a moment, I would love to save 8%, but you say I would have needed to invest the gain in an EIS 12 months before the gain, which doesn't make sense.

Please advise.

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Replying to louisVW4:
Head of woman
By Rebecca Cave
22nd Aug 2016 09:54

As I stated in the article above the investment in EIS sahers must be made within a " four-year window which starts 12 months before the date on which gain is made, and ends to 36 months after that date."
So you have three years after the gain on the rental property was made, to invest in EIS. But also if you acquired EIS shares up to 12 months before the gain was made that earlier EIS investment can also be used to defer the gain.

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