Investors facing a capital gains tax bill have an opportunity to cut it down by investing in the UK’s early stage businesses.
Chancellor George Osborne recently cut the rate of capital gains tax to 20 per cent, down from 28 per cent. It’s applicable in the current tax year, but anyone who made a capital gain in the last three years up to 6 April will still have to pay tax at 28 per cent. The bill is normally payable in January 2017, and it’s for profits made over the £11,000 allowance.
But the tax bill could be deferred by investing in young companies through an enterprise investment scheme (EIS). After the EIS stake has been held for three years, when investors sell out of the investment and hopefully make a profit, capital gains tax will be payable at 20 per cent instead.
“It does depend on the capital gains tax rate staying 20 per cent,” says David Goodfellow, head of wealth planning at Canaccord Genuity Wealth Management. This method of investing is known as “arbitrage” and will also be possible for people who’ve already paid a capital gains tax bill in the last three years, as HMRC can provide a rebate.
But Goodfellow cautions there’s little point investing in an EIS that runs for much longer than three years, as there’s the risk capital gains tax rates are raised in future. “If you select an EIS investment that will be realised in four years’ time, we will still have the current government and I would guess capital gains tax is not going to be increased,” Goodfellow adds. There’s also the added benefit that many EIS schemes give investors 30 per cent income tax relief.
However, EIS are a risky investment and there’s no guarantee an investor will receive all their capital back. It’s advisable to go through a financial adviser who can select the best on the market.