Capital gains are becoming increasingly exposed – but tax relief is available
There’s no doubt capital gains are becoming increasingly exposed. More people than ever are paying capital gains tax (CGT) since the tax-free allowance was halved to £6,000 last April.
This is likely to get worse once the allowance falls further to £3,000 from 6 April 2024 – a quarter of what it was until last tax year and the lowest in 40 years.
In addition, with frozen income tax thresholds, millions are now paying the higher rate of income tax and, consequently, the higher rate of CGT.
Altogether, the Treasury expects CGT receipts to reach a record £17.8 billion this tax year (2023/24) – rising to over £26 billion by 2027/28.
However, there are ways to mitigate this tax. After you have made the most of your ISA and pension allowances, you could consider investing tax efficiently in government-backed schemes such as EIS and SEIS. Both offer generous CGT reliefs to experienced investors comfortable with the risks of investing in dynamic, young UK companies.
- 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.
In addition, any growth in your EIS and SEIS investments should be CGT-free.
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 these investments each tax year, minimum holding periods to retain tax reliefs, and the investments must remain qualifying. Decisions should be based on the investment merit, not the tax reliefs alone. Please note: in the Spring Budget 2024, the Chancellor announced the rate on CGT on residential property will reduce from 28% to 24% from 6 April 2024.
Important: The information on this website is for experienced investors. It is not a personal recommendation to invest. If you’re unsure, please seek advice. Investments are for the long term. They are high risk and illiquid and can fall as well as rise in value: you could lose all the money you invest. Tax rules can change and benefits depend on circumstances.
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 that portion of the CGT for as long as the money stays invested – potentially indefinitely. The tax is only payable at the prevailing rate of CGT 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. For example, you could claim up to £3,000 off your income tax bill on an investment of £10,000. If things don’t work out as planned, you can use loss relief to offset losses 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 on that portion of the gain 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. If the full £200k is invested tax efficiently you could currently receive:
- Up to £100k (50%) in income tax relief
- Up to £28k or £20k (50%) capital gains reinvestment relief, depending on the type of gain
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.
Wealth Club aims to make it easier for experienced investors to find information on – and apply for – investments. You should base your investment decision on the offer documents and ensure you have read and fully understand them before investing. The information on this webpage is a marketing communication. It is not advice or a personal or research recommendation to buy any of the investments mentioned, nor does it include any opinion as to the present or future value or price of these investments. It does not satisfy legal requirements promoting investment research independence and is thus not subject to prohibitions on dealing ahead of its dissemination.