Buy to let landlords wanting to reduce the amount of capital gains tax due on selling property should look at becoming business angels.
Investing in start-ups or fledgling firms comes with some generous tax breaks.
And the schemes allow landlords to put off paying capital gains tax (CGT) for up to three years.
The process works like this – first the landlord sells a buy to let, holiday let, second home or commercial property and realises a gain on which CGT is due.
If the gain is less than £100,000, the gain is invested in the Seed Enterprise Investment Scheme (SEIS), a tax-incentivised investment that lets investors stake up to £100,000 in any tax year.
In return for the investment in a start-up, the landlord gains a refund on income tax paid worth up to 50% of their investment – which is a maximum £50,000 on a £100,000 investment.
Any CGT on the investment cash is deferred for 36 months, providing shares are held in the start-up company for that term.
At the end of the investment, the CGT on the gain falls due, but the landlord has the income tax refund and any growth in the value of shares in the company to pay the liability. Any profit on the shares is free of CGT.
If the company has failed, the government offers loss relief that covers most of the investment.
For gains of more than £100,000, put the first £100,000 in SEIS to grab the higher rate tax refund and the rest into the Enterprise Investment Scheme (EIS).
EIS works the same as SEIS except for the income tax refund is at a rate of 30% and the maximum investment is £1 million.
SEIS and EIS come with investment risk. Start-ups and growing companies have a high failure rate, but the rewards can be significant for those that are a success.
