Tax on property profits from selling a buy to let or second home can give investors a headache – but it is possible to gain some relief.
Like accountants often say about tax, if you can’t avoid it, defer it.
And that’s just what tax-incentivised investments offered by the government can do.
Two investments offer income tax rebates and deferral of capital gains tax (CGT) along similar lines.
The Seed Enterprise Investment Scheme (SEIS) refunds 50% of income tax paid up to £50,000 in the tax year of the investment and puts off paying CGT on assets sold to raise an equity stake in a start-up business, providing the SEIS shares are held for three years.
How SEIS and EIS work
The Enterprise Investment Scheme (EIS) is SEIS’s big brother. EIS allows investments of up to £1 million with a maximum 30% refund against an investment, giving up to £333,333 in a tax year plus the CGT deferral.
The good news is ‘assets’ sold to raise money include buy to lets, holiday lets and second homes.
For a property owner who has made a £150,000 gain, a high rate taxpayer would expect a CGT bill of around £38,890.
Selling today, our taxpayer would expect to hand the CGT cash to HMRC on January 31, 2018.
If the cash went into EIS, the income tax rebate would be up to £45,000, providing the tax had been paid to support the claim.
The £150,000 would sit in the EIS for three years and the taxpayer could spend or hold the £45,000 against the CGT which would become due in January 2021.
What if the company goes bust?
The money would go into EIS rather than SEIS as the maximum SEIS investment is £100,000 and the £150,000 gain exceeds the scheme threshold.
Some fiddly rules add flexibility to the investment.
Taxpayers can bring forward income from the next year to offset against the income tax rebate in both SEIS and EIS.
The risk is the company taking the investment can fail. Investors can mitigate this by investing in an EIS fund to spread the risk.
HMRC also allows loss relief against other income should a SEIS or EIS company fail.
That does not cover the entire investment, but expect the cash lost to be less than the CGT bill.