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I recently hosted a Google Hangout with a tax expert from my professional network, Graham Wilde and probed him for some essential tax tips for our clients.

Graham is a Chartered Tax Adviser with over 20 years’ experience. He is the director of TaxNetUK Ltd. Watch it below:

At MFP, we specialise in working with retired clients, many of whom often have queries about capital gains and inheritance tax on their buy to let properties. I asked Graham some of our clients’ key concerns.

In the right circumstances and with the correct tax advice, Graham said that gifting assets into a trust along with the appropriate ‘hold over election’ can mean individuals avoid capital gains tax, as the trust effectively acquires their original cost of the asset gifted.  This also diminishes the potential inheritance tax liability on the gift over seven years.

The individual making the gift also needs to realise that :

-the income and the asset will no longer be available to them as the asset will be owned by the trust and if they do benefit then the tax planning will not work, however…

-they can still be trustees and control the trust, which we find clients like, especially if they have high income producing assets and wish to retain that asset for the benefit of other family members.

-as trustees controlling the trust, clients can then also pass income or capital to whichever beneficiary of the trust they wish, especially (adult) sons, daughters or grandchildren who may be lower rate or even non tax payers.

Another method clients can use to defer capital gains on the sale of any asset is to make an  Enterprise Investment Scheme (EIS) investment, which has a number of tax reliefs.

Basically this works where you sell an asset standing at a capital gain, the capital gain is then matched to the purchase price of the EIS investment.  EIS shares need to be purchased within a set time based on the date the original asset is sold.  You are able to purchase up to £1 million worth of EIS shares and as Graham explains, you subsequently defer the gain (by making the correct tax election for this) and it effectively ‘sits to one side’ whilst you own the EIS shares. When you sell the EIS shares, the gain comes back into charge but you can reinvest into new EIS shares and re-defer it again.

Other benefits of EIS shares are

  • You get a tax credit at 30% of the price of the EIS shares to use against your income tax liability for the tax year they are purchased or the previous year.
  • After two years the value of the EIS shares should be exempt from Inheritance tax, plus
  • If you hold them for three years and sell them at a profit, the gain on the EIS shares themselves is exempt capital gains tax.

NB: Always remember to discuss with us whether EIS shares are suitable and consider where these will fit into your portfolio. Plus ensure you take tax advice before you undertake any tax planning strategy, especially as tax law changes over time.

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