A guide to Capital Gains Tax | Blog

Capital Gains Tax (CGT) can be tricky to understand but it is relevant to many who hold investments in shares and property. Similarly, if you are anticipating selling an asset, it might be liable to the tax. We’ve put together a simple guide to illustrate the fundamentals of CGT and how it might apply to some of your investments.

CGT is a tax due when you sell something that has increased in value. You will be taxed on the gain that is made rather than the money you receive. Importantly, you only have to pay CGT on gains over and above the annual CGT allowance (currently £12,000 per individual).

However, there are some exceptions and also reliefs in place for individuals investing into Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EIS). 

CGT and EIS Investments

To incentivise investment into smaller companies in the UK, CGT reliefs are available when you invest in an EIS.

There are two types of CGT relief that can apply to an EIS;

  1. Deferral Relief

EIS schemes can be used in order to defer any CGT due on the sale of an asset.

For example, if you were to sell a second home that is not your primary residence, you can invest any gain you have made into an EIS qualifying scheme and you will not need to pay CGT until or unless you take your money out of the scheme.

There is no limit to the amount of gain that can be deferred.

  1. Disposal Relief

In order to receive this relief, you must hold onto your EIS investment for 3 years from the date investments are made into qualifying companies, in which case any gain you make should be exempt from the tax.

As an example, if you invest £10,000 and after 3 years, that original investment has grown to £30,000, you will not need to pay CGT on the £20,000 gain you have made.

CGT and VCT Investments

One of the tax reliefs associated with VCT investments is CGT relief.

CGT does not apply to any gains made from investments in a VCT and there is no minimum holding period for this rule to apply, (although you have to hold your VCT shares for 5 years in order to retain the income tax relief).

This applies for both newly issued or previously owned (second owner) shares.

Disclaimer

The value of an investment can fall as well as rise. Investments in smaller unquoted companies are higher risk than investments in larger quoted companies. Investors may not get back the full amount they invest.

Past performance is not a reliable indicator of future results.

We recommend investors seek professional advice before deciding to invest. Foresight is not able to offer investment advice.

Reference

https://www.gov.uk/guidance/venture-capital-schemes-tax-relief-for-investors#capital-gains-tax-reliefs