Budget 2016 – an opportunity to save CGT on previous gains
Archived article: please remember tax and investment rules and circumstances can change over time. This article reflects our views at the time of publication.
It is with a sigh of relief that we've witnessed today the first Budget in a long time that doesn't penalise high earners.
One of the most welcome changes is the reduction in the rate of capital gains tax from the current 28% to 20%. This will apply to gains realised from 6 April 2016 (except from residential property and carried interest which will remain at 28%).
How could you pay the lower rate of CGT on previous gains?
The lower 20% rate is good news for anybody planning to dispose of assets. It could also be good news for anybody who already has made capital gains and has invested or is considering investing in the Enterprise Investment Scheme (EIS).
In addition to receiving income tax relief of 30%, EIS investors can also defer capital gains liabilities for as long as they stay invested. Imagine someone with a gain of £100,000 today (over their tax free allowance) and an income tax liability of £30,000.
If they did nothing, they would face a £28,000 capital gains tax bill and a £30,000 income tax bill. If they invested £100,000 in EIS this tax year they could erase their £30,000 income tax bill.
In addition, their capital gain could be deferred and the tax would only be payable when they exit the EIS investment, after at least three years. By then, unless the government backtracks on today's announcement, the capital gains tax bill would be £20,000, rather than £28,000.
How much capital gains could you defer?
You can defer unlimited gains into an EIS. However, the maximum you can invest to receive income tax relief is currently £1 million per tax year.
If you haven't used your allowance from the previous tax year, you could invest up to £2 million using the ‘carry back’ facility. This could save you up to £600,000 income tax and allow you to defer £560,000 of capital gains tax (provided you have paid or owe sufficient tax).
Assuming capital gains tax remains at the announced rate of 20% the amount of capital gains tax payable when you encash the investment would be £400,000, a saving of £160,000. You can defer gains made up to three years previously.
Where could you invest?
If you like the idea of investing in small potentially high growth companies, receiving a 30% income tax rebate, and deferring capital gains of up to £2 million, why not take a look at our current EIS offers.
Please note: this article like our service, is not advice and the products we offer are not suitable for everyone. If you're unsure an investment is right for you, please seek professional advice.
This is based on our current understanding of the announcements in the Budget of 16 March 2016, which are not yet legislated for and could be subject to further changes.
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