STOP THE PRESS – opportunity to reduce a previous capital gains tax liability??

At the 2016 Budget, the Chancellor announced that from 6 April 2016, there would be a cut in the main capital gains tax rates.

In the 2015/16 tax year, the capital gains tax rates (for those gains not qualifying for entrepreneurs relief) are 18% on the portion of the gain that falls into the basic rate band and 28% for gains that fall to be taxed above the higher rate threshold. These will be cut to 10% and 20% respectively for 2016/17 onwards.

This reduction in capital gains tax presents an opportunity to reduce an earlier capital gains tax bill. Yes, you did read that correctly – reduce an earlier tax bill!

Example

Billy made a capital gain of £500,000 on an asset that did not qualify for entrepreneurs relief in 2013/14.

As a higher rate taxpayer, Billy would have paid £140,000 in capital gains tax – ignoring annual allowances, capital losses etc. This would have been paid on 31 January 2015.

Due to the change in the capital gains tax rate, Billy has a chance to reclaim this tax and pay a lower amount at some future point.

Billy would do this by investing the £500,000 gain into shares in a company (or companies) which qualify for Enterprise Investment Scheme (EIS) relief, which is an HMRC approved relief. Our independent financial advisers, Clive Owen Wealth Management, can help him choose the correct investment.

We would then contact HMRC on behalf of Billy to advise that Billy wishes to claim a form of deferral relief which effectively postpones (or freezes) his earlier capital gain (due to the EIS investment) and allows him to reclaim the £140,000 capital gains tax bill paid in January 2015. The capital gain ultimately unfreezes at the point at which the EIS shares are disposed.

In addition, as the EIS investment is HMRC approved, Billy is entitled to claim a refund of up to 30% of his EIS investment (£500,000 x 30% = £150,000) as part of his 2015/16 Tax Return. The amount of EIS tax refund is restricted to the lower of 30% of the investment or Billy’s tax liability for 2015/16. (However, bearing in mind the new dividend taxes from 6 April 2016, Billy may have decided to bring forward some of his dividend income from 2016/17 to 2015/16 to pay less tax overall but may have a higher than normal tax bill for 2015/16 compared to earlier years!)

Assuming that Billy retains the EIS shares for three years (very important) then sells the shares (let’s assume for the same as cost), the earlier capital gain will become chargeable but at the capital gains tax rate that applies in the year that he sells the EIS shares.

So Billy’s capital gains tax liability on the £500,000 gain from 2013/14 will be a maximum of 20% i.e. £100,000 (assuming the proposed capital gains tax rates continue to apply in the year in which he sells the EIS shares) – Billy has therefore saved himself £40,000 (£140,000 - £100,000) of capital gains tax. In addition, he has also had EIS relief of up to £150,000.

Looking at the situation overall, how much better off is Billy?

  In / (Out)
EIS investment made (£500,000)
Previous capital gains tax reclaimed £140,000
EIS relief claimed> £150,000
EIS investment realised £500,000
Final capital gains tax bill paid to HMRC (£100,000)
Better off £190,000

Of course this does assume that Billy’s EIS investment is worth the same as the initial cost which may not be the case. If he makes a gain on the EIS shares, this is not a chargeable gain for tax purposes (assuming held for the requisite holding period of, usually, three years). If he makes a loss, he will be entitled to some income tax relief on the cost of the shares (less any EIS relief claimed).

There are lots of issues involved with such an investment but if you are interested, we would recommend that you speak to us at the earliest opportunity as there may be a limited opportunity to make an investment before the end of the current tax year (on 5 April 2016) which may enable you to claim relief for any capital gains tax for the year to 5 April 2013. Any deferral relief must be claimed within three years of the date that the gain arose (not three years after the end of the tax year) so assuming that the gain was made on or after 29 March 2016 (the date that this article was published), then there may be an opportunity.

If you wish to discuss matters further, please make contact with a member of our tax team on the following numbers:

Darlington – 01325 349700
Durham – 0191 3842244
York – 01904 784400