Case Study: Tax Solution – the sale of a second property

The problem

The cottage in West Wales Gwyneth and Richard bought several years ago gave them many wonderful family holidays. Now Richard is a widower and the cost of the cottage’s upkeep has risen. With the drive to the coast becoming increasingly tiring, he’s decided to sell the cottage.

He had the cottage valued and it should sell for £250,000. This would mean a £100,000 capital gain on the property, resulting in a capital gains tax (CGT) liability of £28,000. This second home, combined with the value of his main home and substantial savings, will put him well over the £650,000 combined nil rate band for inheritance tax (IHT), so anything above this will be taxed at 40%. He wants to minimise the CGT and IHT liabilities but isn’t sure how to do so.

Our tax-planning solution

If Richard invests the £100,000 capital gain from the sale of the second home into an Enterprise Investment Scheme (EIS), his CGT liability can be deferred and eliminated, provided the EIS is held at death. The £100,000 OEIS investment is expected to become IHT-exempt after two years (saving him a further £40,000) and he’ll receive £30,000 income tax relief to offset against any pension or other income he has.

The remaining £150,000 from the sale of the property could be invested into an Inheritance Tax Service (OITS), and his estate is expected to be IHT-exempt after two years – saving him £60,000. Unlike with some IHT solutions, Richard retains access to this capital if required – for ad hoc or regular withdrawals.

By investing in both these tax-efficient solutions, the entire proceeds of the property sale is expected to be exempt from IHT in just two years.

Notes: Capital Gains Tax has been reduced to 20% from April 2016. A main residence nil rate band staring at £100,000 will be in place from 2017/2018.