Many landlords are looking to sell part of their residential property portfolios in order to reduce the burden of non-deductible interest from 6 April 2017. The deduction for interest paid will be replaced by a 20% tax credit, but this will mean highly geared lettings businesses may run at a loss.
However, paying Capital Gains Tax (CGT) at 28% is a big disincentive to sell properties. One solution is to invest the gains made in Enterprise Investment Scheme (EIS) shares. Where all the conditions are met by the EIS company and by the investor, the reinvested gain is deferred while the EIS shares are held.
You are not required to hold the EIS shares for any minimum period to achieve deferral of the gains. But if you also want to take advantage of 30% Income Tax relief on your EIS investment you must hold the shares for at least three years.
When you dispose of your EIS shares the deferred gain becomes taxable at the general rates of CGT applicable at that time. Crucially, as it is the gain which is deferred, not the disposal of the residential property, the deferred gain becomes charged to CGT at 20% not at 28%, assuming today’s tax rates apply at that time.
You must subscribe for EIS shares within a four-year window which starts exactly 12 months before the day on which you make the gains. There is no limit on the amount of gain you can reinvest in EIS shares in order to achieve deferral.
There can be a delay between subscribing for EIS shares and receiving the EIS3 certificate, which you must submit to HMRC to claim the tax relief. Ask the EIS company about anticipated delays before you invest, as a significant delay in issuing EIS certificates can mean you need to pay the CGT before you can submit a claim for a deferral of that tax.
Specialist investment advice should always be taken before investing in EIS shares as they represent a risky asset class.