Selling your buy-to-let? Where to find capital gains tax relief

Archived article

Archived article: please remember tax and investment rules and circumstances can change over time. This article reflects our views at the time of publication.

More landlords are finding buy to-let unviable and leaving the sector, the Bank of England reports. 

Mortgage rates have shot up, and many now face doubled monthly repayments: since 2020 the interest on rental property can no longer be offset against income tax. In addition, the new energy efficiency requirements will likely require expensive property improvements. 

Landlords who are selling now could crystallise property value gained over the years. But how much of this might be paid away in capital gains tax (CGT)?

Broadly speaking, if you make a profit selling a property, you pay 18% CGT as a basic-rate taxpayer, or 28% as a higher-rate taxpayer, on gains over the £6,000 CGT-free allowance (recently halved and to be further halved to £3,000 from April 2024).

What reliefs are available?

Experienced investors comfortable with investment risk could receive capital gains tax relief by investing through the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS):

Important: tax rules can change and benefits depend on circumstances. EIS and SEIS invest in small, young companies, so are high risk. You should not invest money you cannot afford to lose. The minimum holding period to retain the tax reliefs is three years and the investment must remain qualifying. This is a simplified explanation of complex rules: if in doubt, please seek specialist advice.

Defer taxable gains when you invest in EIS

Deferral Relief is one of the lesser-known tax perks of the EIS. 

You could defer a taxable gain – and the resulting CGT – if you invest that gain into EIS. The CGT bill would only normally become due – at the prevailing rate – when the EIS investment is realised. Alternatively, you could reinvest in another EIS and continue to defer the gain potentially indefinitely.

How could EIS Deferral Relief work in practice?

Imagine you have realised a taxable gain of £100,000 from selling a buy-to-let property (in reality, the gain could be from selling any asset: shares, a business, a holiday home, etc.) and have a £28,000 CGT liability alongside a £30,000 income tax liability. 

You could invest £100,000 into an EIS, save up to £30,000 income tax (through EIS income tax relief) and defer £28,000 of CGT. As a result, you would have £100,000 working for you, instead of having to pay a £58,000 tax bill. Remember, though: these generous tax reliefs are offered by the government in recognition of the high risks of investing in small UK businesses: you could lose all the money you invest.

EIS Deferral Relief at a glance – an example

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For illustrative purposes only. Assumes you are a higher or additional-rate taxpayer and have already used your CGT-free allowance. The 28% rate of CGT applies to residential property: other chargeable gains might incur a rate of 20%. Tax rules can change and benefits depend on circumstances.

There’s no upper limit on the value of gains that can be deferred.

To qualify for deferral relief, the reinvestment into EIS must be made at least 12 months prior to, or three years after, the original gain was made.

A deferred gain dies with you

If you die whilst you own the EIS shares, the gain dies with you and no CGT is payable. 

This could be attractive to older investors who are comfortable with the much greater risk and might want to sell down assets such as second homes: it provides a way of passing down money to the next generation without having to pay CGT or IHT (EIS investments should also qualify for IHT relief after two years, if you still hold them on death). 

What should you bear in mind?

In addition to the considerable risks of investing in small, young companies, there are two things you should bear in mind when deferring a gain. 

Firstly, you are deferring the gain, not eliminating it. When the investment is realised, the CGT bill would become payable. That applies even if the investment is realised at a loss or at no value at all. One mitigating factor is that you should be able to write off losses either against your capital gains tax liability or income tax liability through EIS loss relief

Secondly, when the CGT becomes payable, the prevailing rate at that time will apply. This could be higher or lower than the rate at the point of the EIS investment. Remember, tax rules can and do change and the value of benefits will depend on individual circumstances.

Save up to 50% on a CGT bill when you invest in SEIS

When you invest in SEIS, you may be able to cut your CGT liability in half (this is called Reinvestment Relief). 

How could SEIS Reinvestment Relief work in practice?

Imagine you have a £100,000 taxable gain (£28,000 CGT liability) and a £50,000 income tax bill. 

If you invest £100,000 in SEIS, you could claim up to £50,000 back in income tax and £14,000 (half of £28,000) in CGT. 

This means instead of paying a total tax bill of £78,000, you have £100,000 working for you. Moreover, that £100,000 SEIS investment could effectively cost you as little as £36,000, once you take the tax reliefs into account.

SEIS Reinvestment Relief at a glance – an example

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For illustrative purposes only. Assumes you are a higher or additional-rate taxpayer and have already used your CGT-free allowance. The 28% rate of CGT applies to residential property: other chargeable gains might incur a rate of 20%. Tax rules can change and benefits depend on circumstances.

Unlike EIS, SEIS Reinvestment Relief is capped. To claim Reinvestment Relief you must have claimed the income tax relief in the same tax year. So, in the above example, to claim full relief on the £28,000 CGT bill, you would first have to claim the £50,000 income tax relief in the same tax year. The maximum you can invest in SEIS with tax relief is currently £200,000.

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