Friday May 30, 06:25 PM
Enterprising investors save tax on gains made three years ago
By Alice Ross
Investors are not sufficiently aware of an unexpected side effect of the new capital gains tax rules, advisers say, which means they can effectively claw back tax paid years ago and benefit from the new 18 per cent rate. Those who could benefit
include buy-to-let investors, those who have profited from the stockmarket in the past three years, and those looking to protect their estate against inheritance tax.The way to make the tax saving is via an Enterprise Investment Scheme (EIS). These schemes have always allowed capital gains tax to be deferred, as the tax on gains realised up to three years before investing into an EIS can be deferred indefinitely - or until the EIS investment is sold. But with the significant drop in CGT from a maximum of 40 per cent to 18 per cent in April this year, the three year rule means that considerable savings on tax could now be made. The 40 per cent tax already paid can be claimed back if the entire gain is invested into an EIS. The only further tax paid would be when the EIS investment is sold, incurring a maximum tax of just 18 per cent, though the investment does have to be held for at least three years. Simon Rogerson, chief executive at Octopus Investments, describes the opportunity as "a massive deal". "It's not widely known at the moment as it's a relatively complicated piece of legislation," he says. "But people have made pretty big gains on the stockmarket in the past three years so the benefit could be enormous." Octopus is expecting twice as much business in its EISs this year as a result of the new legislation. It could also help those who have been caught out by the new CGT rules when selling property bought as an investment, says Jason Walker, senior manager at AWD Chase de Vere. Anyone who exchanged contracts on a property in the last tax year but did not complete until this tax year is liable to tax at the old 40 per cent rate and not the new 18 per cent rate - an unfortunate fact that many clients are unaware of, says Walker (1386.HK - news) . These people could mitigate the impact of the 40 per cent by transferring the gain into an EIS. This could be a good move for buy-to-let investors in general, says Walker, many of whom have been hit by the credit crunch and are looking to sell their property on before prices fall further. "At the moment, people are looking to get out, so this allows them to sell now but also defer the gains tax," he says. A further benefit of deferring tax is that the annual CGT allowance will have risen in three years' time, so the qualifying amount for CGT will be lower. EISs are pooled funds that were introduced by the government in 1994 to encourage private investment in new UK businesses. They offer a variety of tax reliefs, which are intended as an incentive for investing in potentially higher risk companies - usually start-up companies that may be privately owned or listed on the Alternative Investment market (Aim). One benefit is income tax relief, whereby investors can reduce their income tax liability by 20 per cent of the amount invested, up to a maximum of £500,000 a year. Another is inheritance tax exemption. EIS investments qualify for business property relief after they have been held for two years, which means they fall out of an estate for IHT purposes. The schemes are therefore particularly suitable for those looking to mitigate IHT. EISs vary in risk. Octopus offers a protected scheme which Rogerson says is aimed at people using it for financial planning reasons and not looking for a lot of growth. Its other EIS, called Eureka, invests in private equity companies and is higher risk, with far higher fees too - a performance fee of 20 per cent over any return of capital applies. However, advisers warn that EISs in general are not for the faint-hearted. Paula Higgleton, tax partner at Deloitte, says: "The one thing to bear in mind is that these are inherently risky investments as they tend to be start-ups, so it's all very well getting the tax relief but you don't want your investment to go belly up."
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