Tax trick for landlords who want to slash their CGT bills

Landlords do not have to pay capital gains tax at high rates if they are prepared to reinvest their gains for a short time.

As part of former Chancellor George Osborne’s tax grab from landlords, he set CGT rates for buy to let property disposals at a basic rate of 18% and higher rate of 28% even though other investors pay 10% or 20 on their gains.

But landlords can qualify for these discount CGT rates with a little tax planning.

A little-known tax loophole lets landlords reinvest their property gains into shares issued by a company taking part in the Enterprise Investment Scheme (EIS).

The landlord can opt for deferral relief on the capital gain, reducing the CGT rate from 18%/28% to 10%/20% and income tax relief at 30% of the money invested up to £1 million each tax year.

How the tax loophole works

EIS rules offer deferral relief on capital gains however long shares in a qualifying company are held – whether that’s 24 hours or the EIS term of three years.

However, an investor claiming income tax relief has to keep the shares for at least 36 months.

Although EIS rules do not specify a cap on gains for deferral relief, the tax incentive only allows relief on £1 million a year. That means gains can be washed through EIS in other tax years.

Investing in an EIS company does not come without a risk.

By their nature, companies within the scheme are start-ups with little or no trading records.

However, according to the latest HM Revenue and Customs (HMRC) statistics, more than 24,500 companies have raised £14 billion of funding since EIS start in 1993.

Timing is crucial

For the tax break to work for landlords, the company must be in EIS, not the Seed Enterprise Investment Scheme (SEIS), as SEIS does not offer the same incentive for capital gains deferrals.

The trick is deferring CGT changes the gain from one on property to one on shares- and reduces the CGT rates accordingly.

Taxpayers generally pay CGT in the year of the disposal but deferral relief puts this off until some future date, which improves cash flow as well.

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