Higher Tax rates retained
Many landlords were furious that when the general rate of CGT was reduced to 20% (10% for basic rate taxpayers) on 6th 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 very large tax bills for some individuals from 2017/18, as I explained in my Blog ‘Tax Changes To Income from Property’, posted on Nov 24th 2015.
As I suggested in that Blog, 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 the gain for a short period, he or she 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.
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 Independent Financial Adviser 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.
(The Enterprise Investment Scheme (EIS) is a series of UK tax reliefs launched in 1994 and designed to encourage investments in small unquoted companies carrying on a qualifying trade in the UK. For more information go to: https://www.gov.uk/government/publications/the-enterprise-investment-scheme-introduction )
EIS 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 18% tax saving.
Conditions EIS Tax Relief
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 Tax relief!
The taxpayer must report the gain arising from the disposal of his residential property on his self-assessment tax return by 31st 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 or she can claim either EIS income tax relief or capital gains deferral relief. This can take up to six months after the date of investment and the CGT due can’t be postponed pending an EIS claim.
When the EIS3 certificate arrives the tax return can be amended (HMRC allows this to be done up to 12 months after the original submission) and a repayment of the CGT paid should be claimed.
If you would like more detailed information on some aspect of UK Tax, send me an e-mail and I’ll be pleased to advise further.