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Kirk Rice Blog

Capital Gains Tax PlanningWritten on February 11, 2015 by Peter Sharratt

Financial Services Questions

The Question:

I would be interested in any tax planning that my wife and I could consider, mainly in relation to Capital Gains Tax, as we have recently sold a Buy to Let property and made a healthy gain which will be taxable.  My wife is a higher rate tax payer and I am a basic rate tax payer.

Peter Sharratt answers:

There are a number of tax planning ideas to consider before the 6th April but I will focus on two that would be relevant to your Capital Gains Tax (CGT) bill.  The first one to consider is making a pension contribution as this will benefit from income tax relief with basic rate tax relief (BRT, 20%) given at source.  Higher/additional rate tax relief (HRT, a further 20%/25%) has to be claimed via self-assessment.  This income tax relief could help offset the CGT.  Any gain in excess of the CGT allowance (currently £11,000) is taxed at 18% for BRT payers (where the gain & income remains below the HRT threshold) and 28% for HRT payers.

As an example a HRT payer with a taxable gain of £20,000 would pay £5,600 in CGT leaving a net gain of £14,400.  Allowing for all tax relief a net investment of £14,400 would actually result in a pension fund of £24,000.  The above example would be more relevant to your wife as she is a HRT payer but the same planning could be considered by you.  The sums would be different, still however worth considering.

The second option to consider is an Enterprise Investment Scheme (EIS).  The first point to make clear before moving on to the ‘why’ is that these are complex, higher risk financial products which can be difficult to sell/realise the capital from in future.  They will generally be suitable for sophisticated and/or high net worth investors. You should get advice from a suitably qualified and experienced Adviser before investing. EIS’s qualify for tax relief at 30% and can be used to defer CGT realised on another investment.  If the £20,000 taxable gain from my earlier example was invested in to an EIS the CGT of £5,600 would not be payable and tax relief of £6,000 could also be claimed.  Any growth is tax free and after 2 years the EIS is exempt from inheritance tax.  To retain the tax relief the EIS must be held for at least 3 years.  The above summarises two options, both have contribution limits and, of course, varying degrees of risk.  You should as always get further advice.  Click here to view an EIS Guide on our website

If you would like more advice regarding this issue or any other financial services matter, please contact us.

If you would like to receive Kirk Rice’s Financial Services Questions regularly by email, simply email info@kirkrice.co.uk stating Financial Services Questions in the subject heading and we will add you to our distribution list.

Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made.

A pension is a long term investment.  The fund value may fluctuate and can go down.  Your eventual income may depend upon the size of the fund at retirement, future interest rates and tax legislation. 

Taxation – Information is based upon our current understanding of taxation legislation and regulations.  Any levels and bases of, and reliefs from taxation, are subject to change.

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