The Daily Telegraph - Your Money - - YOUR MONEY - Richard Dyson

Let’s cel­e­brate: here’s a tax loop­hole that puts savers’ cap­i­tal to bet­ter use

Wealthy in­vestors who are sell­ing prop­er­ties ahead of April’s in­creased tax­a­tion of buy-to-let are us­ing a com­plex – but en­tirely le­git­i­mate – means of avoid­ing cap­i­tal gains tax.

They are si­phon­ing the gains made on prop­erty sales into niche in­vest­ments where all their tax can be re­couped via other gov­ern­ment in­cen­tives.

In ex­change, how­ever, they have to ex­pose their cap­i­tal to risk.

Fig­ures from HMRC show a surge in the money be­ing poured into such in­vest­ments. Spe­cial­ists in the field say much of the flows come from prop­erty sales. This is how it works. Say an in­vestor has sold a rental prop­erty and crys­tallised a tax­able gain, af­ter his an­nual cap­i­tal gains tax (CGT) ex­emp­tion and other al­lowances, of £200,000.

He is a higher rate tax­payer. Re­mem­ber that while CGT rates ap­ply­ing to gains on in­vest­ments such as shares fell in April 2016 to 20pc (for higher-rate tax­pay­ers) and 10pc (ba­sic-rate), there is a sur­charge for gains on buy-to-let in­vest­ments. This was one of Ge­orge Os­borne’s sev­eral at­tacks on own­ers of mul­ti­ple prop­er­ties.

So our higher-rate tax­payer here will pay 28pc of his tax­able gain: £56,000. To work through the ex­am­ple in de­tail, as­sume the gain was made in this tax year (2016-17), so the tax bill would not have to be set­tled un­til Jan­uary 2018.

His fi­nan­cial ad­viser – and you al­most cer­tainly need one for this – rec­om­mends he puts the £200,000 in to an “en­ter­prise in­vest­ment scheme”. This achieves two things. First, he can no­tify HMRC of the in­vest­ment and that en­ti­tles him to an in­come tax re­bate of 30pc of what he’s put in: £60,000 in this case.

Sec­ond, it means he can de­lay pay­ing the CGT bill for as long as he owns the in­vest­ment.

So if he’d done noth­ing he’d have pock­eted his £200,000 gain and in due course would have paid £56,000 to the tax­man.

But in­stead he’s got in­vest­ments ini­tially val­ued at £200,000 (be­fore charges) plus £60,000 sit­ting in the bank to pay the CGT bill when it even­tu­ally re­quires to be set­tled.

There are, as you’d ex­pect, quite a lot of nig­gly lit­tle catches. First, you need to have paid enough in­come tax to get the £60,000 tax re­fund. If you’re on a low in­come rel­a­tive to the gain you’re at­tempt­ing to shield, this isn’t go­ing to be easy. But you can bring for­ward in­come tax paid on the year be­fore the one in which you in­vest, along with the year it­self. On that ba­sis some­one earn­ing around £100,000 should be able to get back the £60,000, or near enough.

The in­vestor also needs to hang on to the as­sets for three years min­i­mum in or­der to re­tain the in­come tax re­bate. Any gains made on the hold­ings are tax-free. But these are high risk busi­nesses so losses are likely. The sweet­ener though is that any losses can be used to re­duce tax­able or in­come else­where. So there are many aspects to this ma­noeu­vre,

Many prop­erty in­vestors are cur­rently crys­tallis­ing gains – in some cases, as here in south west Lon­don, even be­fore prop­er­ties are com­pleted

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