Buy to let and Capital Gains Tax
Many buy to let investors have sold their properties in recent years, as the income tax benefits have made them less attractive. Others have sold simply enjoy the gains they have made. And the gains on them can be quite significant.
If you are thinking your buy-to-let property income is being reduced too by tax, you may be able to avoid income tax as a buy to let landlord through a VCT. See Buy-to-let landlords and VCTs for more information.
However, if you are selling your second property, you cannot do this over a number of years, unlike shares where you can, because property is just one asset.
But, there is an investment that could defer the gain on a second property, and convert it into an asset that can be disposed of over a number of tax years.
To start saving tax, talk to one of our advisers on 01793 686393, or contact us online
An Enterprise Investment Scheme. An EIS would do three things for a buy to let landlord who has made a taxable capital gain:
- It would mean they could delay paying the capital gains tax now.
- It would mean that gain in a property is now converted to a gain in the form of shares, which in the future can be sold
- The CGT liability would be based on the CGT rate for shares, either 10% or 20%, and not property which would be £18% or 28% (depending whether the gain was taxed a lower rate or higher rate tax).
- It would reduce their income tax bill, either for the current tax year, or even the previous tax year
How does an EIS save tax?
Like a VCT, an EIS also qualifies for income tax relief of 30%.
But unlike a VCT, you can claim tax back from the last tax year, not just the year the monies are invested.
Because Mr Jones has a salary of £50,270, he has an income tax bill of £7,500 each year.
With his £50,000 investment into an EIS, he instantly delays his CGT liability, AND can have his income tax bill wiped out for this and last tax year.
So, he holds the EIS for three years, and the EIS is in a position to allow him to come out, and it still holds its qualifying status. He begins then to dispose of the shares.
He starts on the 30th March, and his £50,000 investment is still worth £50,000 (it hasn’t grown or fallen in value). This £50,000 is still subject to CGT on encashment.
But he has also retired now, and his income is only £20,000 per year. So, he sells half of it in March – £25,000. This is now subject to CGT. He has the CGT allowance to set off against this gain, which means that he does not pay tax on the first £12,300 (currently). So he has CGT to pay on around £12,700. Now, two things have happened, his income is below the higher rate tax threshold, even with the extra £12,700, and he has converted the gain to one based on shares. So, in this instance he pays CGT of 10% of the £12,700, which amounts to £1,270.
The remaining £25,000 he sells at the end of April, (a month later). This is a new tax year, and he can now use that year’s annual allowance too, and so has a CGT liability on £12,700, another £1,270.
So, he has paid a CGT liability of £2,540 (two lots of £1,270), and not the original £14,000, and remember in the past he has saved £15,000 in income tax.
There is no doubt that an EIS is a complicated and a high risk investment, and not suitable for everyone. But they do offer the potential for high returns.
In addition to the tax benefits listed above, EIS shares can also help avoid Inheritance tax, and there is also “loss relief” which can be claimed if the EIS fails or is sold at a loss.
For more information see Enterprise Investment Schemes for more details.
If you want advice on how to reduce your tax, or have a question, or just want to have a chat about reducing you tax liability with a UK regulated Independent Financial Adviser, then phone now on 01793 686393 or contact us online.