It seems unfair that landlords have to pay capital gains tax at a rate of up to 28% when disposing of a buy to let property when other investors have their CGT capped at 20%.
To level the playing field, here’s a little known trick that wipes out that unfair extra tax for landlords.
Landlords can wash their capital gains through the Enterprise Investment Scheme and lose that 8% surcharge, providing they are willing to reinvest their cash for a short time.
The Enterprise Investment Scheme (EIS) is a government tax incentive to raise funding for start-up businesses. EIS has run since 1993 and raised £14 billion for close to 25,000 companies.
If a landlord buys shares in an EIS company with the money raised from a capital gain, HM Revenue and Customs (HMRC) allows them to slice 8% off their CGT rates.
Instead of 28%, the top rate lowers to 20% and the basic rate falls from 18% to 10%.
EIS investors have to hold their shares for 36 months if they are claiming 30% income tax relief, but if the strategy is to reduce CGT only, the rules place no time limit on how long the investor has to leave their cash in an EIS.
Many EIS company shares are tradeable on the London Alternative Investment Market (AIM).
The strategy comes with some risks –
- HMRC will not postpone CGT payments on the promise of a future EIS deferral claim
- EIS companies are risky investments as they are unlikely to have a trading record
- Investors may have problems disposing of EIS shares
- Deferral relief claims are supported with documents from EIS companies that are sometimes slow to arrive
Despite these problems, a £100,000 gain taxed at 28% means a CGT payment of £28,000 can reduce to £20,000 (not including other reliefs and allowances).