In identifying ways to cover the considerable costs brought about by the pandemic of 2020, Chancellor Rishi Sunak has suggested a substantial raise in the amount of tax levied on capital gains. Higher-rate taxpayers will be amongst those who are hit hardest, if this report is to come to fruition. Especially those in ownership of second homes, or assets not shielded from tax.

Granville Developments, the award-winning property developers, have partnered with the capital investment experts, The SidebySide Partnership, with the aim of providing valuable tax solutions to higher-rate taxpayers, post-property sale. Head of Business Development at SidebySide, James D’Mello, has provided Property Secrets with his impressive insight into the indefinite deferral of an individual’s capital gains tax (CGT). In order to do so clearly and effectively, James has put together an example scenario, featuring retiree, Jack Brent.

For the last 15 years, Jack Brent has owned three buy-to-let properties, close to the train station in Sevenoaks. As he moved into his retirement, Jack wanted to avoid the issues associated with property management and inheritance tax, and as such, decided to sell all three properties. Whilst Jack initially paid a total of £300,000 for the three properties, he managed to sell them for £700,000 net of solicitors and fees. This resulted in a combined capital gain of £400,000.

Following this successful sale, Jack is going to invest into a tax efficient investment fund. This will allow him to defer the capital gain, whilst also helping to shelter his assets from inheritance tax, once they are passed onto his children. These long-standing, government-backed schemes provide investors with particularly generous tax reliefs following their investment in younger British companies.

By investing the total £400,000 value of his gain into qualifying shares, Jack could defer his full CGT bill of £112,000 – and, as long as he has held the shares for a minimum of 2 years, he would also qualify for inheritance tax relief on his investment. The remaining £300,000 can be used to comfortably fund Jack’s retirement (and pay off the remaining mortgages, of course). Further to these benefits, there’s a possibility that – depending on the amount of income tax he has paid – Jack could claim up to £120,000 of relief against his income tax bill!

CGT deferred through this form of tax efficient investment will remain deferred until the investment is sold. Once it has been sold, another investment can be made to defer the tax again.

If Jack was to pass away, a minimum of two years after making this investment, his fund value would transfer to his children, exempt from the 40% inheritance tax. On top of this, Jack’s £112,000 of CGT would expire upon the event of his death, too.

If Jack had decided not to proceed with the above tax planning, his financial situation would look something like this:

The £400,000 capital gain would still have been attained upon the sale of Jack’s three properties, but he would then need to pay £112,000 in CGT, leaving him with £288,000. £115,200 of potential inheritance tax would be deducted, once the assets have been passed on, ultimately leaving Jack with a mere £172,800 left of his £400,000 gain.

With recent changes to the rules surrounding the reporting and payment of CGT, and potentially more changes to come, higher-rate taxpayers can find multiple benefits in thoroughly exploring the options available to them.

James D’Mello the Side by Side Partnership

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