Capital gains tax takings doubled in last five years – but tax relief is available
The Treasury halved the capital gains tax-free allowance to £6,000 this April. But new figures show taxpayers have already been feeling the squeeze.
Capital gains tax (GCT) receipts have roughly doubled over the past five years – from £9.2 billion in 2018/19 to £18 billion in 2022/23 (up 96%). With the CGT-free allowance to be further cut to £3,000 in April 2024, the OBR expects the tax to rake in over £26 billion a year by 2027/28.
This pressure will only mount. Income tax thresholds have been frozen. So, more earners will be pushed into the higher rate of income tax, and consequently the higher rate of CGT.
However, whilst capital gains are increasingly exposed, there is shelter available for experienced investors comfortable with the risks of investing in dynamic, young UK companies through EIS and SEIS.
- EIS offers Deferral Relief: you could defer taxable gains, potentially indefinitely – whilst claiming up to 30% income tax relief.
- SEIS offers Reinvestment Relief: you could save up to 50% on a CGT bill, plus up to 50% on your income tax bill.
Tax benefits depend on circumstances and tax rules can change. This is a brief outline based on current rules: there are detailed conditions and rules you should consider carefully before investing. There are limits to the amount which can be invested into some of these investments each tax year, and minimum holding periods to retain tax reliefs may apply. Decisions should be based on the investment merit, not the tax reliefs alone.
How to save on capital gains tax with EIS and SEIS
Defer gains with EIS
When you invest any portion of a gain in EIS, you should be able to defer the CGT for as long as the money stays invested – potentially indefinitely. The tax is only payable when you realise your EIS investment, unless you roll that into another EIS investment. You could defer gains realised up to one year before and three years after your EIS investment date. You can invest up to £2 million (if including knowledge-intensive EIS) per tax year.
In addition, any growth is tax-free and the investment should be IHT-free if held for two years and on death. To benefit from the tax-free growth, you must have also claimed the income tax relief: when you invest in EIS you can offset up to 30% income tax relief against your current year’s tax bill or the previous year’s. If things don’t work out as planned, you can offset loss relief against your income tax.
Cut a CGT bill in half with SEIS
The most generous tax reliefs are reserved for investing in the youngest – and therefore highest-risk – companies, under SEIS. When you invest any portion of a gain in SEIS, you could reduce the CGT bill by up to 50%. You may use the relief on investments in the tax year of your investment, or the year before. To use the CGT relief, you must have also claimed the income tax relief (up to 50%) in the same year. You can invest up to £200,000 per tax year.
Any growth is tax free, the investment should also be IHT-free if held for two years and on death, and you could claim loss relief if things don’t go to plan. As with EIS, to benefit from the tax-free growth you must have also claimed the income tax relief.
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