In April 2016 Capital Gains Tax was cut from 28% to 20% for higher rate taxpayers and from 18% to 10% for basic rate taxpayers. At the same time, residential landlords and individuals that own more than one home were excluded from the new rates. But did you know that through some careful tax planning, if you fall into one of these categories you can still qualify for the lower rates?
There are a number of ways to mitigate Capital Gains Tax, such as:
- Transferring a share of the property you wish to sell to a spouse to make use of their annual exemption and lower tax rate
- Claiming every expense, allowance relief and claim possible (many landlords say they are, but we usually find out they are not!)
Through taking advantage of the above options it is possible to reduce your Capital Gains Tax liability significantly. However, the lowest rate achievable is only ever going to be 18%.
But what if you wish to reduce your Capital Gains Tax liability even further? Well you could invest in an enterprise investment scheme (EIS), which can potentially allow you to reduce Capital Gains Tax to 10%.
For the above to work you would need to invest all or part of the gain you make from selling a residential property into an EIS. This will allow you to defer the Capital Gains Tax until you decide to sell the EIS investment. Through placing your investment in an EIS you immediately change the nature of the gain, from a residential property gain to a normal gain, meaning that standard rates of Capital Gains Tax could now apply (10-20%).
What is more, investing your money in this way allows you to still apply the tax planning strategies bulleted above, enabling you to reduce your gain even further when it is released from your EIS investment.
EIS’s provide great investment opportunities; although like all good things, there is a risk involved. An EIS scheme allows you to invest in small to medium sized companies, which are often high risk. You would therefore need to enter into this option with your eyes wide open and do your research to ensure a suitable company is found. EIS’s are not suitable for those who are risk adverse, although for those willing to take a chance they can prove lucrative. For example, if you were to keep the investment for at least three years you can claim a generous income tax credit in addition to the Capital Gains Tax advantage.
For further information or advice on Capital Gains Tax planning, please contact our tax expert Neill Staff at firstname.lastname@example.org.