Kicking yourself for selling a rental property this year? Recent tax cut is still within your grasp
As part of the budget earlier this month, the chancellor announced that, from 6 April 2024, Capital Gains Tax (CGT) charged on residential property sales, other than your primary residence, would fall from 28% to 24%.
That move is designed to encourage housing transactions, free-up housing stock and potentially increase the overall tax take. But if you sold a house in the last 12 months you won’t qualify.
That might leave you kicking yourself.
Using the Enterprise Investment Scheme to defer your CGT
However, sellers could still potentially qualify for the lower CGT rate if they take advantage of the little known CGT deferral benefits available through the Enterprise Investment Scheme, or EIS.
The scheme was set up by the UK government to support investment into smaller UK companies. To encourage investment it offers generous tax reliefs, including 30% income tax up front and, crucially, CGT deferral.
Invest the gain from a CGT liable investment in an EIS qualifying investment and you defer the CGT charge until the EIS investment is realised. The rate of CGT charged is the prevailing rate at the time the EIS investment is realised.
The net effect is that buy to let investors who sold their house in 2023/24 (and potentially up to three years earlier) could potentially defer any CGT bill, and then pay it at the lower 24% rate – assuming no changes to the tax rate in the near future.
Some risks to consider
There are a few things to bear in mind.
Firstly the CGT rate you pay on exit is the prevailing rate at the time of exit. CGT rates do change, and its always possible a future government raises CGT again, perhaps to above 28%.
Secondly EIS investing is risky. You could get back substantially less you than you invested, but your CGT liability would remain unchanged. That’s a potentially dangerous mismatch if you don’t have other funds available to meet the CGT liability when it falls due.
