Worried about a mounting CGT bill? There’s a way you could halve it

Speculation continues over whether the new government might increase the rate of capital gains tax (CGT). 

Of course, nothing will be known for certain until the Budget in October – but, according to the press, many wealthier investors and landlords are selling investments and properties now, so that their gains may be taxed at the current, possibly lower, CGT rate.

If you too are looking to dispose of assets and worry about a mounting CGT liability – there’s a way you could halve that bill under the current rules.

HMRC offers generous tax breaks – including reliefs you could apply against your CGT bill – as an incentive for experienced investors to take the risk of backing dynamic young UK companies, an important engine of the economy.

This article looks at the most generous tax reliefs: up to 50% savings on income tax and CGT – reserved for backing the smallest, youngest (and hence highest-risk) startups under the Seed Enterprise Investment Scheme (SEIS).

We illustrate how the CGT reinvestment relief works – and how you could apply it to this or last year’s tax bill. We also highlight one of our Featured SEIS funds, Startup Funding Club SEIS Fund, which is targeting pre-Budget deployment for applications received by 16 August. 

Tax rules can change, and benefits depend on circumstances. This is a brief outline based on current rules: there are detailed conditions and rules you should consider carefully before investing. Decisions should be based on the investment merit, not the tax reliefs alone.

How you could save up to 50% on your CGT bill: investing in SEIS

Whether you already have a CGT liability, or expect to have one in the near future, you may be able to cut it in half when you invest in SEIS-qualifying companies – this is known as Reinvestment Relief. 

How could SEIS Reinvestment Relief work in practice?

Imagine you have a £100,000 taxable gain from selling a second home(so, a £24,000 CGT liability if it was sold this tax year, and potentially more if sold the previous year when the rate was 28%) and a £50,000 income tax bill. 

If you invest the full gain of £100,000 in SEIS, you could claim up to £50,000 back in income tax and £12,000 (half of the CGT bill) in CGT Reinvestment Relief. 

This means instead of paying a total tax bill of £74,000, you could have £100,000 invested at an effective cost of as little as £38,000, once you take all the available tax reliefs into account.

SEIS Reinvestment Relief at a glance – an example

To claim Reinvestment Relief you must have claimed the SEIS income tax relief in the same tax year. So, in the above example, to claim full relief on the £24,000 CGT bill, you would first have to claim the £50,000 income tax relief in the same tax year. If you were to invest less than the full gain, the CGT relief available is calculated pro rata. The maximum you can invest in SEIS with tax relief is currently £200,000 per tax year.

Carry back – apply the relief to this or last year’s tax bill

A feature called “carry back” gives you the option to offset the SEIS relief against your previous year's income tax and CGT bill – so you could potentially get back tax you've already paid. 

In practice, if you use both current and previous years’ allowances, you could potentially invest up to £400,000 in one go. Remember, though, to use Reinvestment Relief you must claim the income tax relief in the same tax year as the gain, so you couldn’t use last year’s allowance against a gain this year.

Other SEIS tax advantages include: tax-free growth, loss relief, and IHT relief after two years – read more on SEIS tax relief.

Featured SEIS fund targeting pre-Budget allotment: Startup Funding Club SEIS

To help make tax planning easier for investors, Startup Funding Club SEIS Fund has launched a special £1 million tranche, targeting deployment by 4 October 2024 – ahead of when the Budget is expected to take place (note: that date has not yet been announced). 

The first deadline for this pre-Budget tranche is 16 August. Investors are expected to receive a portfolio of c.15 companies – deployment timings and size of the portfolio are not guaranteed. 

The fund is run by SFC Capital (previously Startup Funding Club), one of the most active seed investors in Europe. SFC has invested in nearly 500 companies and achieved some notable successes, such as Cognism, a machine-learning driven marketing platform (partial exit generating a 39.9x return). 

Overall, the fund has achieved 13 full or partial exits to date, returning £3.8 million to investors, from investments costing £0.87 million. Past performance is not a guide to the future; there have also been failures, as is to be expected when investing in very early-stage companies – see detailed fund performance.

Performance of Startup Funding Club SEIS per £100 invested in each tax year