If you have recently sold a residential property, you will likely have made a healthy capital gain and discovered that special higher tax rates apply to this. There may be a way to defer paying this tax and reduce it overall. Here’s how:
EIS tax reliefs
Investing in a company which qualifies for EIS (Enterprise Investment Scheme) tends to offer a few tax advantages, such as up-front income tax relief, capital gains tax (CGT) free growth on the investment and capital gains tax deferral relief.
CGT deferral relief means you can defer the taxation of any capital gain you made in the previous year or the three years following your EIS investment. When this happens, the gain becomes taxable only when you sell or transfer your EIS investment.
Let’s look at an example to demonstrate this process:
Joe makes capital gains of £100,000 in 2018/19, and makes a qualifying investment of the same amount in an EIS company. He claims CGT deferral relief, meaning he is not required to pay the capital gains tax that would be due on 31st January 2020. Joe then sells his EIS shares in 2025/26, triggering a tax charge on an amount that is equal in value to the deferred gain taxable for that year.
How does this work for residential property gains?
If you have recently sold a residential property, then you will know that the rules explaining how the deferred gain will be taxed are worded in a very specific way, and you can make the most of this by doing research and using the rules to your advantage.
As of April 2016, rates of tax on capital gains are 10%, as long as your income combined with the gains comes to no more than the income tax basic rate band. If they exceed this, they are then taxed at 20%. However, when the gain concerns residential property (such as houses, flats, apartments, land intent for building, and so on) the rates are 18% and 28% respectively.
How does EIS deferral relief help you be more tax efficient?
By using EIS deferral relief, you can change the nature of a residential property gain to a non-residential one, and therefore benefit from the lower, normal CGT rates of 10% and 20%. You’re probably wondering why more people don’t do this? Though this tax-saving arrangement is entirely legitimate, HMRC discourages it by making the rules hard to get around (but not impossible).
How do you overcome HMRC guidelines?
It’s difficult to find information that helps you navigate HMRC guidelines, especially since there are a lot of varying answers online. Some sites will indicate that the previously deferred gain is only liable for CGT at 10% or 20%, and others (more in line with HMRC guidelines) will tell you that the deferred gain retains its original status as a residential property gain. Understanding the legislation is the key to making this distinction, and this is something that Price & Accountants can assist you with.
HMRC guidelines in layman’s terms
In the Schedule 5B Taxation of Chargeable Gains Act 1992, you will find the EIS deferral relief rules explained in full. This states that the revived gain is “equal to so much of the deferred gain” in proportion to the amount of EIS investment sold.
Here’s a simple example of this to break it down further:
Joe sold 50% of his EIS investment in 2025/26, so the capital gain taxable is an amount “equal to” the same proportion, i.e. 50% of the original gain. As is often the case, minor, seemingly insignificant wording details in tax legislation can completely alter a tax bill. In the case of the EIS deferral relief rules, an EIS investment could potentially reduce your tax rate by almost half, which is an amazing saving.
When must this be paid?
By making an investment in an EIS company, you make it possible to defer when tax is payable on the gain, and you will only pay this when you sell or transfer the investment. Although HMRC rules disagree, most tax experts will advise you that the gain changes its nature because of the deferral and so special higher rates of tax no longer apply, helping you be significantly more tax efficient.
If you want to find out more about how your residential property sale could be more tax efficient than you think, get in touch with our team at Price & Accountants. We are committed to helping small businesses in London and around the UK with their accounting needs, using Xero online accounting software and our expert team of advisors, all dedicated to helping your business flourish.