I have recently sold a second property in Central London for a substantial profit. I am looking for tax-saving ideas and also longer-term investments that are fairly speculative to take advantage of weak markets. If I buy another property, will I get rollover relief on the funds? Also, can I make a single-premium pension payment as I am behind on my pension provision?
First, let me deal with the belief that investment properties qualify for rollover relief – they don't. The Inland Revenue views private property transactions for profit, assuming they do not involve a main residence, as an “adventure in the nature of trade”. As such, they do not allow you to defer the capital gains tax due on the sale in the way some business assets do.
There are some exceptions to this. If your property was formerly your main residence and is being sold because you have recently married, then you may escape CGT, although the sale must be completed within two years.
If this is not the case, then there are other options. One of these, as you correctly identified, is a pension. By investing some of the proceeds in a pension, you will not avoid having to pay CGT but earning income tax relief may take out some of the sting.
You can, of course, use the proceeds of the sale to make a single-premium pension contribution. The amount you can invest will depend on your age and will be a set percentage of your net relevant earnings for that tax year.
You can still take advantage of carryback on a single-premium pension although you must nominate that you are carrying back at the time you make the contribution (this has changed slightly from previously).
Carrying back will allow you to use up your pension capacity from a previous tax year as well as the current tax year. If both years are maximised and you still have capital available, then you can take advantage of the basis year rules to continue to make contributions in future tax years up to your percentage limit based on your net relevant earnings for the basis year selected.
After you have exhausted pensions or if you are looking at other ways of managing the capital gains tax liability, then you can look at venture capital trusts and enterprise investment schemes.
EIS deferral relief replaced reinvestment relief from April 6, 1998. You need to acquire a qualifying EIS within a period of one year before and extending three years after the disposal of the property that has created the gain. The money is invested in a small unquoted company, so you must bear in mind the risks associated with that type of investment, and the minimum timescale is three years.
You should also bear in mind that some schemes use the tax relief to hide substantial charges. If you are happy on all these counts, then an EIS offers deferral of CGT with potential income tax relief up to 20 per cent on top.
The limit for investment into an EIS is £150,000. They are slightly more flexible, and therefore more risky, than venture capital trusts.
A VCT is a quoted company investing at least 70 per cent in qualifying unquoted companies, which can include companies listed on the Alternative Investment Market. A VCT offers 20 per cent income tax relief, deferral of a capital gain and tax-free distributions.
There is no CGT on gains made from the VCT shares and, as a collective, up to 30 per cent may be invested in non-qualifying stocks such as blue-chip equities. This gives them appeal to those seeking tax savings and exposure to the markets in a more speculative way.
The disadvantages include no business property relief from inheritance tax, higher than average risk and a lack of a clearly defined or guaranteed exit strategy.
The inheritance tax issue is quite significant as business property relief may have applied had you invested directly into the underlying companies. Clearly, this needs to be weighed up carefully. There is an annual limit of £100,000 a year on VCTs but, by careful planning, it is possible to invest £300,000 from a single gain by straddling three tax years.
Clearly, different aspects of each of the above may be more or less suitable to your particular circumstances but I am sure they have given you food for thought.