Capital gains tax (CGT) is a levy on profits made from the sale of certain assets, such as stocks, bonds, and real estate. In the UK, CGT rates range from 10% to 28%, depending on the type of asset sold and the taxpayer’s income tax bracket.
One potential way to avoid or reduce CGT liability is through reinvestment relief. This relief is available to investors who reinvest the proceeds from the sale of a chargeable asset into certain qualifying investments, such as the Enterprise Investment Scheme (EIS) or the Seed Enterprise Investment Scheme (SEIS).
How Reinvestment Relief Works
Reinvestment relief allows investors to defer or reduce their CGT liability by reinvesting the proceeds from the sale of a chargeable asset into qualifying investments within a specified time frame. The specific rules and benefits of reinvestment relief vary depending on the type of investment scheme used.
Enterprise Investment Scheme (EIS)
- Deferral Relief: Investors can defer their CGT liability on gains reinvested into EIS-qualifying shares for as long as the investment remains in the EIS.
- Loss Relief: If an EIS investment results in a loss, the investor can offset that loss against their capital gains or income tax liability.
Seed Enterprise Investment Scheme (SEIS)
- Reinvestment Relief: Investors can reduce their CGT liability on gains reinvested into SEIS-qualifying shares by up to 50%.
- Loss Relief: Similar to EIS, investors can offset losses on SEIS investments against their capital gains or income tax liability.
Example of Reinvestment Relief
Suppose an investor sells a property and realizes a capital gain of £200,000. The investor is in the higher rate income tax bracket, which means they would normally be subject to a CGT rate of 28%.
If the investor reinvests the entire £200,000 gain into SEIS-qualifying shares, they can defer their CGT liability indefinitely. This means they will not have to pay any CGT on the gain until they sell the SEIS shares.
Other Considerations
While reinvestment relief can be a valuable tool for reducing CGT liability, it is important to note that it is not available for all types of assets or investments. Additionally, there are certain conditions and time limits that must be met in order to qualify for the relief.
Reinvestment relief can be an effective way to avoid or reduce capital gains tax liability in the UK. By reinvesting the proceeds from the sale of a chargeable asset into qualifying investments, such as the EIS or SEIS, investors can defer or reduce their CGT liability. However, it is important to carefully consider the specific rules and conditions associated with reinvestment relief to ensure that it is the right strategy for your individual circumstances.
Do You Pay Capital Gains Tax If You Reinvest UK
FAQ
Can you avoid capital gains tax if you reinvest?
Can you avoid capital gains tax by buying another house UK?
How do I avoid capital gains tax in England?
What is the 36 month rule?
Do you pay capital gains tax if you reinvest?
Capital gains generally receive a lower tax rate, depending on your tax bracket, than does ordinary income. However, the IRS recognizes those capital gains when they occur, whether or not you reinvest them. Therefore, there are no direct tax benefits associated with reinvesting your capital gains. How can I avoid paying capital gains tax UK?
How do I avoid capital gains tax?
The simplest way to avoid capital gains tax is to regularly use your capital gains tax allowance (officially known as your annual exempt amount or AEA). How easy this is to do depends on the assets you are selling.
What happens when you reinvest capital gains?
When a capital-gains distribution is paid, the fund share price drops by the amount of the distribution. Reinvesting capital gains maintains a fund account value, rather than having the value decline by the amount of the distribution. How do I avoid capital gains tax when selling a second home?
Can a capital gains tax relief be withdrawn?
The maximum gain to be relieved is capped at £100,000 and the relief will be withdrawn if the SEIS relief is ultimately withdrawn. For example, anyone with capital gains of £100,000 in the current tax year can reduce their tax bill by 50% by reinvesting these gains via the SEIS. The investment must be made in the same tax year as the gain was made.