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September 1, 2016
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EIS Deferral Relief – Capital Gains Tax Savings for Residential Landlords

The normal rate of capital gains tax (CGT) payable from April 2016 is 10% for basic rate taxpayers and 20% for higher and additional rate taxpayers. This lower rate of CGT however does not extend to gains on residential property for which the rates remain at 18%/28%.

There is scope however for landlords of residential property to take advantage of the Enterprise Investment Scheme (EIS) and deferral relief in order to pay tax at the lower rates of 10%/20% on their capital gains.

Overview

In order to benefit from the lower rates of CGT an individual would need to reinvest the residential property gain by subscribing for shares issued under the EIS scheme and claiming for deferral relief. The tax payer is not required to hold the shares for minimum amount of time in order to obtain deferral relief, although it should be noted that there is a minimum period of ownership attached to income tax and capital gains relief (detailed below).

There is also no limit to the amount of gain that an individual may reinvest into the EIS scheme however only investments of up to £1m per tax year will qualify for the income tax relief.

The deferral relief simply allows for any capital gain to be held over until the eventual disposal of the shares. When the shares are disposed of, the capital gain may become taxable at the general rates of 10%/20% rather the residential rates of 18%/28%, thereby allowing the investor a potential saving of 8%.

Conditions

Aside from the company issuing the shares under the EIS scheme, the shares must also be subscribed for either 12 months before the gain is made or 36 months after that date in order for the deferral relief to apply.

Reporting to HMRC

An individual would need to report the capital gain arising from the sale of residential property on their self-assessment tax return for the tax year the property was disposed of. This would be due by 31 January following the tax year of disposal.

In order to claim for EIS deferral relief, the tax payer must obtain an EIS3 Certificate from the company which is used to certify that the conditions for EIS relief have been satisfied.

If the certificate is not obtained by the tax return deadline then the CGT due on the residential property would be payable. The tax return may be amended however once the certificate has been obtained and a repayment of CGT may be claimed.

Additional EIS Reliefs

There are further benefits to investments made under the EIS scheme:

  1. 30% of the value of the investment may be set against an individual’s income tax bill in the tax year of investment; and
  2. CGT exemption i.e. no capital gains tax would be payable on the disposal of EIS shares.

The above reliefs however would require the investor to meet the necessary conditions of the EIS scheme for a period of at least 3 years from the later of the date the shares were issued and the date that the qualifying trade began.

The EIS scheme is designed to help smaller, higher risk trading companies to raise finances by providing incentives for investors in the form of the reliefs detailed above. It is advisable therefore that an individual also speaks to an independent financial advisor before proceeding with the above as EIS companies do represent a higher risk for investment.

 

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