But then again, too few to mention…

Life is too short for regrets on the whole. What is done is done. The milk has been spilled and no amount of crying will avoid the need to mop it up.

This brings me clumsily onto the subject of capital gains tax. Prior to the Budget on 16 March 2016 we had a headline capital gains tax rate of 28%. There was an annual exemption of just about £11k, a 10% tax rate for certain assets that qualified for entrepreneurs’ relief and an 18% rate for other gains where the individual was a basic rate taxpayer. But mostly gains were taxed at 28%. There was some fear that the rate would, perhaps, be increased in the Budget and some capital gains were crystallised in order to lock in the “lower” rate.

The Budget however produced something altogether unexpected. To the surprise of many, the 28% rate was to become 20% and the 18% rate 10% with effect from 6 April 2016. Terms and conditions apply – the lower rates do not apply to “UK residential property interests” or the “carried interest” (something to do with hedge funds) – and it is all subject to the Finance (No 2) Bill 2016 becoming law.

Sound the regret claxon…. Pity the poor soul who locked in a chunky capital gain at a 28% rate on his 4% shareholding in Oops Limited. If only he had waited and he could have saved 8% in tax.

This is where the enterprise investment scheme (EIS) can really make a difference. EIS investments can be used to defer capital gains made up to three years before a qualifying investment is made (or up to one year after). The gains only crystallise when the EIS investment is disposed of, or if it ceases to qualify as an EIS investment within three years. With the 28% rate reducing to 20% it is therefore possible to extinguish at least 8% of an old tax liability by deferring it into an EIS investment.

There is more.

EIS investments can also qualify for up to 30% income tax relief, which can be utilised either in the current year or the previous year. By careful timing of investments it may be possible to maximise the income tax relief available, where the tax liability in one year is not sufficient to use up the full 30% tax relief.

Example

Bob made a capital gain on March 2014 of £100k after the annual allowance and paid £28k tax on it. He pays income tax of around £20k a year.

By making a qualifying EIS investment before March 2017 of £100k he can defer the capital gain from 2013/14 of £100k and receive a refund of the tax paid of £28k. Only when the EIS investment is sold (or ceases to qualify) will the gain fall back into charge, and then only at a maximum of 20% (£20k). In fact the chances are that there will be further annual allowances available to reduce the tax still further.

He can also make use of £30k income tax relief against his tax liabilities in 2016/17 and 2015/16.

  • Investment £100k
  • Income tax relief £(30k)
  • Capital gains tax relief £(28k)
  • Net cost £42k

 Furthermore….

Provided at least some income tax relief is claimed then if the EIS investment itself creates a capital gain then it would be exempt from tax (after three years) no matter how large that gain is.

If a capital loss is made (based on the cost of the investment being net of income tax relief) then this can be offset against income tax rather than capital gains tax if it is more beneficial to do so.

Once held for two year then the EIS investment may qualify for business property relief for inheritance tax (IHT) purposes – potentially removing 40% of the value of the investment from the owner’s IHT bill on death if the investment is still held.

It all sounds very attractive – but there is a slight catch. EIS investments tend to be at the riskier end of the spectrum according to my colleagues in PKF Francis Clark Financial Planning and specialist advice is required before someone enters into an EIS investment. There are a number of conditions that need to be met, and continue to be met, both by the investor and the EIS company.

However, the message is that if you regret having made a capital gain in the last three years and paid tax at 28% on it, then EIS may in some cases be a way of changing things for the better.

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