Buy to let and second home owners worried about capital gains tax and property prices may find a solution in staking their profits in government schemes to boost fund-raising for businesses.
The Seed Enterprise Investment Scheme and Enterprise Investment Scheme both offer a haven for capital gains even though they come with some investment risk.
Both offer a route to minimising capital gains tax on property profits – providing the scheme rules are carefully followed.
Picking a scheme depends on the amount of capital gains a property owner needs to wash through the tax system.
SEIS allows investments of £100,000 in a tax year, while EIS is open to up to £1 million.
Slashing CGT rates
Both tie up cash for three years to get the full benefit from tax breaks.
Neither wipe-out gains, but both allow investors to defer paying CGT for three years – and then slash the bill.
If a property owner sold a buy to let or second home, CGT is due at a rate of 28% for higher and additional rate taxpayers and 18% for basic rate taxpayers.
Switching the money to a SEIS or EIS keeps the gain intact for three years.
If the tax has been paid, the full amount is refunded for the duration of the investment.
After the three years is up, the tax then becomes due, but at a reduced rate of 20% for higher and additional taxpayers or 10% for basic rate taxpayers.
But that’s not all.
Extra tax breaks
SEIS and EIS come with other tax breaks, including an income tax refund on the value of the investment which is worth up to £50,000 for SEIS and £300,000 for EIS.
Investors also benefit from no CGT on any growth in value of the SEIS or EIS shares.
Should the deal fail, loss relief is also available that safeguards most of the investment.
The downside is SEIS is for start-ups and EIS is aimed primarily at early-stage growth companies. In both cases, the companies have little or no trading history and present a risk to investors.
The investment does not have to go into a single SEIS or EIS company – several funds temper the risk by spreading the money around several businesses.