The end of October saw the release of HMRC statistics for CGT in 2014/15 and it wasn’t pretty. Capital gains liabilities increased by 25% to £6.9bn from the previous year’s figure of £5.5bn to reach the second highest figure ever. The only higher CGT take was after the 2007-08 financial year when capital gains tax liabilities reached a record high of £7.7bn.
HMRC noted that this latest increase was largely driven by growth in the equity and property markets, as capital gains tax is charged on the profits made when certain assets are sold or transferred. There was also a rise of 13% in the number of capital gains taxpayers – from 214,000 to 242,000.
We know that EIS can be a great way to mitigate CGT and to defer CGT by reinvesting capital gain. But did you know that it can now also reduce the CGT payable on certain deferred gains? Well, it can. It’s time sensitive, and only for clients who are suitable for EIS and have made capital gains in the last three years, but it’s worth checking out as it’s a legitimate tax planning opportunity:
In April 2016, capital gains tax was cut from 18% to 10% for basic rate taxpayers and from 28% to 20% for higher rate taxpayers. This means that a gain (made in the last 3 years and not generated from the sale of residential property and carried interest schemes) that would have attracted CGT at 28% can be invested in an EIS and deferred.
The reinvestment must be made within a period starting one year before and ending three years after the disposal of the original asset. The original gain is frozen until the EIS shares are sold, provided the investor remains in the UK. Any further gain made on the qualifying EIS shares is exempt provided they have been held for a minimum period of three years. When the EIS shares are sold, the original gain becomes taxable but can be deferred by making a further EIS qualifying investment.
Once the investor finally exits the EIS and the gain crystallises, it will be taxed at the new, lower rate of 20%. This is an 8% saving on tax even before capital gains allowances or any growth in the EIS is taken into account.
It works like this:
Jim disposed of a listed shareholding on 6 October 2015 (2015/16) realising a capital gain of £300,000. Ignoring his annual exemption, he would pay CGT at 28%, which equates to £84,000. Jim has 3 years to make an EIS investment (i.e.5 October 2018) to defer all or part of this CGT liability. He actually makes an investment of £100,000 in June 2016 and is therefore able to defer capital gains equal to his EIS investment (i.e. £100,000) and reduce his CGT bill by £28,000, which would otherwise be payable.
The capital gains deferred are effectively ‘frozen’ and these will then crystallise in the year of a ‘chargeable event’, which is most commonly the sale of the EIS shares. In which case, Jim will pay CGT on the deferred gains at the new lower rate of 20% (i.e. £20,000). The opportunity to defer and pay later has enabled Jim to save CGT of £8,000.