The power of Capital Gains Tax deferral relief
- On February 16, 2017
- By Kate Arnold
When talking about Capital Gains Tax (CGT), most of us have been prudent enough to invest our hard-earned cash and fortunate enough to see this grow to a decent size, then the taxman comes in and takes his slice off the top. The question is: are we being taxed for being savvy?
There are many ways in which we can reduce our CGT bill: making use of the allowance, transferring assets to our spouse/partner and even making use of our losses. Let’s assume however, you’ve done well for yourself and now the taxman is knocking at your door.
A largely under-utilised route that can be taken is to invest in an Enterprise Investment Scheme (EIS). Aside from the fact that any gains made on such an investment are free from CGT if they are held for 3 years, there exists an unappreciated godsend called Capital Gains Tax deferral relief.
Simply, the payment of tax on a capital gain can be deferred if invested in the shares of an EIS qualifying company. This investment must be made within a period of one year before or 3 years after the gain arose. The good news is that this gain could have arisen from the disposal of any kind of asset – this means the door is wide open for opportunities:
— Remember that client that had just sold that buy-to-let property?
— The couple you saw last week that had just disposed of their holiday home?
— What about the client planning to liquidate their very successful share portfolio in 6 months time?
When is the capital gain deferred to? Well there’s no minimum period for which the shares must be held and simply enough, whenever the shares are disposed of, that’s when the charge is re-applied. If however, the client was to pass away whilst in possession of these shares, there is no CGT to pay at all. That’s worth saying twice – 0% CGT. In addition if the EIS shares had been held for 2 years, there would be 0% Inheritance Tax (IHT) to pay too.
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