Defer a gain and reduce your tax

You can defer tax payable on capital gains by investing in certain types of company. But how can you turn this timing advantage into a real tax saving?

Gain to gain

If you have investments potentially liable to CGT, e.g. shares or property, then using your annual exemption is sensible planning. It could give you nearly £11,000 of tax-free income (gains actually) every year. Conversely, if your gain is too great, you could be creating an unnecessary tax bill.

Not so well planned

Let’s say you’ve taken advice from a broker or just decided to sell enough shares or other assets to make sufficient gain to use your tax-free CGT exemption for the year. Then, unexpectedly, one of the companies in which you own shares is taken over and your shares are purchased from you. If that produces a gain it will be fully taxable.

Trap. A similar problem could arise where you just want to take advantage of high share prices that you think may not hold up. If you’ve already used your CGT exemption, the tax you’ll have to pay may make it a deal breaker.

The EISy option

You can use an Enterprise Investment Scheme to claim back CGT you’ve paid in the previous three years. But you can also use it to stop tax being charged in the first place.

Example. Ed sells some shares in April 2013 making a capital gain of £11,000. His annual exemption of £10,900 means that only £100 is taxable (at 28%). But in January 2014 Ed is offered £150,000 for a property he bought for £125,000. If he sells it, he’ll pay CGT on the £25,000 profit; this will be payable to the Taxman on January 31 2015. He goes ahead with the deal but if he invests £25,000 into an EIS, within the following 36 months, he can deduct the cost of the investment from the gain, thereby reducing his January 2014 CGT bill to next to nothing. But this will only defer the gain.

Cutting the gain

Provided he hangs on to the EIS company shares for three years he can sell them at which point the £25,000 gain he deferred becomes chargeable. So, in Ed’s case if he sold the EIS shares in January 2017, the 2014 property gain becomes chargeable. The good news is that he can now use his 2016/17 CGT exemption against the gain, which by then may be worth, say, £11,500. That means Ed will cut the original £7,000 (£25,000 x 28%) CGT bill he was facing down to £3,780 (£25,000 - £11,500 x 28%).

Tip 1. If Ed was married, he could transfer some of his EIS investment just before sale to his spouse. If they had an unused CGT exemption, that could double the tax saving.

Tip 2. Ed doesn’t have to sell all of the EIS investment in one go. He could instead sell, say, half in January 2017 and half at the end of April 2017. Although only three months apart, the sales would fall into two different tax years (2016/17 and 2017/18). That would mean Ed gets two annual CGT exemptions which would reduce the taxable gain even further.

If you would like any further information, please don't hesitate to get in touch for a free initial meeting.

Defer a gain and reduce your tax

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