Budget 2008: Chancellor gives opportunity to cut existing CGT bills by 25% or more

Commenting on today's Budget, Paul Willans, partner at international accountants Mazars and Chief Executive of Mazars Financial Planning said:

"The Chancellor's previously announced changes to the Capital Gains Tax regime, together with a 25% increase in contributions to Enterprise Investment Schemes (EIS) have provided a spectacular opportunity to reduce tax on personal capital gains realised over the last three years, while also benefiting from Income Tax relief.

While Income Tax relief is limited to £500,000 of investment (from £400,000 in current tax year), capital gains deferral relief is unlimited and will allow gains that would otherwise be liable to tax at a rate of at least 24% to be deferred until eventual disposal of the EIS. On disposal, the gain will be taxed at the prevailing rate which is 18% from 6 April, thus enabling tax payers to reduce CGT liabilities by at least 25% and potentially reduce their income tax bill at the same time.

For example:

Mr A sells his buy to let home in February 2008 and realises a taxable gain of £500,000. He has owned the property for over 10 years, so a tax rate of 24% applies i.e. a tax bill of £120,000.

By investing £500,000 in an EIS, he can defer this tax liability and also receive income tax relief at a rate of 20%.

On disposal of the EIS, based on the new CGT rate of 18% from April 2008, his tax bill would reduce to £90,000, a saving of £30,000.

EIS are a higher risk investment, but with the introduction of lower volatility offerings, investors now have a golden opportunity to claim back tax already paid, while possibly reducing income tax liabilities. It is important that potential investors consider the risk attached to EIS, and suitability for their overall financial planning, but anyone who has realised a gain over the last three years should give thought to this opportunity.

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© 2008 Mazars LLP, the UK firm of Mazars, an international advisory and accountancy group.