Meg Saksida continues to uncover the best ways to invest from a capital gains tax perspective.
Capital gains tax (CGT) revenues have risen constantly over the last four years and are now filling the government’s coffers to the tune of £8.8 billion.
The main way to mitigate CGT on investments is to invest in exempt assets. In my article in September’s Tax Insider, I outlined how investing in wasting chattels, chattels costing and disposed of for under £6,000, and sterling coins were free from CGT. In this article, I’ll consider enterprise investment scheme (EIS) and seed enterprise investment scheme (SEIS) investments, and also clever use of the annual allowance.
EIS and SEIS
EIS and SEIS are two types of private equity investment. They are broadly small and tiny companies respectively, with strict requirements as to the industries in which they operate and the size of the companies in terms of turnover, balance sheet totals, and number of employees.
Apart from the income tax advantages (i.e. up to 30 or 50% of the investment as a tax reducer respectively), from a CGT perspective there are also great advantages.
No gain on sale but an allowable loss
If EIS or SEIS shares are sold at a gain, that gain will be exempt as long as the shares were held for at least three years and the investor received income tax relief on the investment. If the shares were sold at a loss, that loss is an allowable loss.
Reinvestment relief
Where a taxpayer re-invests the sale proceeds of any asset on which he has made a gain (e.g. a painting, a residence, other shares) into qualifying EIS or SEIS shares, he may claim EIS or SEIS reinvestment relief.
EIS reinvestment relief allows the taxpayer to defer the gain (however large, without limit) until a later date. Unless the taxpayer dies, CGT on the gain will eventually be payable at the earliest of the date:
- the EIS shares are sold;
- the EIS shares no longer qualify for EIS conditions (nb floatation of the EIS company will not crystallise the gain);
- the EIS shares are gifted (unless to the investor’s spouse); or
- the taxpayer becomes non-UK resident within three years of the issue of the EIS shares (unless to work full-time and returns within three years).
This is, however, only a deferral. Unless the taxpayer passes away, they will eventually have to pay the CGT.
With SEIS investments, as long as income tax relief has been claimed, SEIS reinvestment relief can be claimed. This relief is far more generous than EIS relief as it does not defer the gain; it exempts the gain completely for CGT up to a maximum of 50% of the investment in the SEIS company, or the gain, whichever is lower.
There is a similar relief for investments in social enterprises, which are not considered in this article.
Utilising the annual allowance
Spouses and civil partners should also ensure that where a gain is anticipated by one of the couple for an amount over the annual exemption (i.e. £12,000 in 2019/20), consideration is given to transferring part of the asset to the other spouse if they have not used their full annual allowance.
Transfers between spouses are normally made on a ‘no gain-no loss’ basis and, as such, gains can easily be transferred from one to the other just before disposal to ensure that both the duo enjoy a full annual allowance. This can save up to £3,360 CGT annually.
Practical tip
Ensure your attitude to risk is considered before investing in EIS or SEIS companies. They provide exposure to small or tiny early stage companies rather than well-established mainstream companies and, as such, present a much larger risk. Seek suitable investment advice.
