The Telegraph’s Richard Dyson explains why buy to let landlords are turning Venture Capitalists…
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The 2016 Budget made significant changes to the Capital Gains Tax (CGT) regime, with a reduction from 28% to 20% for higher rate tax payers – provided the gains were not generated from the sale of residential property and carried interest schemes. Coupled with the changes around the tax treatment of mortgage interest as an allowable deductable expense against rental income and a property market that has growing less quickly, some landlords are turning to Venture Capital as an alternative to buy to let. This has a particular attraction given the favourable tax treatment of backing growth companies through Enterprise Investment Scheme EIS Funds.
The Enterprise Investment Scheme (EIS) can be used to shift an ‘old’ 28% CGT liability into the ‘new’ 20% CGT environment. With EIS, a little known aspect of CGT deferral, or more technically ‘reinvestment relief’, is that the rate of CGT used to calculate the deferral, is different from the rate of CGT applicable at the time the gain is revived (aka ‘re-crystalised’) when the EIS qualifying investment is sold. In short; the old 28% gain, becomes a new 20% gain.
A higher rate tax-payer crystalises a CGT liability of £200,000 on the sale of a buy to let property. Assuming they have already used of their CGT annual allowance, they will have to pay £56,000 of CGT (at 28%) on this amount.
Rather than pay their CGT bill, the investor uses the gross amount of the original gain (£200,000) and invests into, for instance, the Par EIS Fund.
The taxpayer receives income tax relief of 30% on the £200,000 (£60,000) and is no longer required to pay the £56,000 of CGT. In total, tax relief of £116,000.
When the investments are sold or exited 3+ years down the line, whilst income tax relief is retained, a CGT liability will ‘recrystalise’…but at the rate of 20% (ie a £40,000 CGT bill), not 28% (a £56,000 CGT bill, as HMRC treats the recrystalised gain as a new CGT liability occurring from the sale of shares (chargeable at 20% only).
Alternatively if you think 30% income tax relief is not enough, you could use the Seed Enterprise Investment Scheme (SEIS) to get 50% income tax relief. SEIS has many similarities, but also some important differences.
Please note: Kin is unable to give taxation or financial advice and strongly recommends private investors speak with a suitably qualified independent financial adviser. Your capital is at risk and all our products are long term, high risk investments. They will not be suitable for all investors. The level of tax relief received depends on individual circumstances and may be withdrawn at a later date.