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Where Taxpayers and Advisers Meet

EIS shares given to charity

PeterLondon
Posts: 11
Joined: Wed Aug 06, 2008 3:49 pm

EIS shares given to charity

Postby PeterLondon » Mon Feb 23, 2015 8:24 pm

I have a property which I think would sell for £310k , I paid £150k for it.

In the future I wish to give about £40k a year to charity. I will assume the annual CGT allowance is £10k to make the numbers easy.

Q1 Suppose I sell the property and over that the year and the next two tax years I buy £50k of shares in EIS companies

I believe I defer the gain of about £150k until the EIS shares are sold = -£310k - £150k - annual allowance of £10k

Say three or four years later rather than sell the shares so that CGT liability on £50k becomes due

Suppose I give 80% of the EIS shares to charity and then use my annual exemption of£10k

Do I permanently avoid the CGT on the property I sell?

Ian McTernan CTA
Posts: 1232
Joined: Wed Aug 06, 2008 3:02 pm
Location: Bedford
Contact:

Re: EIS shares given to charity

Postby Ian McTernan CTA » Tue Feb 24, 2015 2:21 pm

So in order to avoid tax on the gain of £150,000 (around £42,000) you instead want to give it away to a charity?

Let's assume you receive 30% tax relief on your investment. so your net investment in the EIS is £105,000.

You then give 80% of this to the charity (£120,000), and save being taxed on 30,000 of the gain, saving £8,400 of tax. Your net investment is now £75,000, being the £150,000 you put in, less the IT relief, less the £30,000 you took back out over three years to utilise the CGT allowance (i've ignored the partial disposal rules and many others to keep this simple).

So to avoid a maximum of £42,000 of CGT you have placed all your profit in a risky investment vehicle that could in theory be worthless after 3 years and at best has cost you £75,000 in real hard cash.

If your purpose is solely to avoid the CGT on the sale, then you achieved it. But it cost you almost double the tax bill.
McTernan Associates Ltd
Chartered Tax Advisers
Bedford
Email through link on website:
http://www.imcternan.com

LozaACCS
Posts: 1504
Joined: Wed Aug 06, 2008 3:55 pm

Re: EIS shares given to charity

Postby LozaACCS » Tue Feb 24, 2015 10:46 pm

I similarly cannot see what are trying to achieve.

The initial gain (using Ian,s figures) is 42K, this would be deferred (but not exempt) under Sch 5B TCGA 1992.
You use the proceeds to make a qualifying EIS investment, ie 150K * 30% = 45K, so you are 3K in credit at this stage.
When you dispose of the shares, the deferred gain comes back into charge, (I do not believe there is any provision to exempt disposals to a charity under Sch 5B) so whilst the disposal of the EIS shares themselves is on a no gain/no loss basis, the deferred gain comes into charge, so you are now left with a charge under Sch 5B of 42 * 80% = 34K.

So if you did nothing you would have cash of 150K and a tax bill of 42K
Your proposal is to give away 120K and end up saving 11K (45K IT relief less 34K CGT)

PeterLondon
Posts: 11
Joined: Wed Aug 06, 2008 3:49 pm

Re: EIS shares given to charity

Postby PeterLondon » Thu Feb 26, 2015 5:54 pm

Thank you very much for your replies especially as I phrsaed my question so badly.

In terms of what I am trying to achieve in 1998 to 2002 I bought 15 flats mostly in Battersea.

I paid £1.7 million for them and I guess they are worth about £6.0 million now .

I have an agent who does most of the work looking after them but at some time I would wish to sell up.

When I do that I will have a large capital gains tax bill.

I make about 150k income on these and who knows what on captal gains say 300k if property increases in value by 5% per annum. So about £450k per annum

I also seek to give about 10% of my income away and when I start to sell up I will seek to give some of the capital gains away.

The reason why I said an EIS scheme was that I have worked quite a lot with homeless people and if I could find another three investors I thought about buying something like a cafe with three other people in a similar situation and having some of the people form the drop in manage it.

I talked to the small business unit the revenue set up and they said a cafe could be bought by an eis company.

One of the people who ran the drop in has an “acedemy” set up where Pret a manger train people who were on the streets but are seeking to learn a skill.

I thought buy a cafe for £200k between 4 people £50k each. Get tax relief of £60 k run it and depending on how profitable or otherwise it was sell up in three years giving my shares to charity.

In the 1990s the BES scheme allowed you to buy residential property with a 40% discount as long as you could get 4 people together.

This proved to be a good idea. You can not buy residential property under an EIS scheme but a freehold cafe I thought had simialr characteristics

If I just give £40k away I would get tax relief of 40%.

This way I wondered if I could avoid some of the CGT bill I will be paying.

I can see when you say

I do not believe there is any provision to exempt disposals to a charity under Sch 5B)

This would not work.

So thanks again

LozaACCS
Posts: 1504
Joined: Wed Aug 06, 2008 3:55 pm

Re: EIS shares given to charity

Postby LozaACCS » Thu Feb 26, 2015 9:13 pm

There is a serious amount of CGT at stake.
I really would suggest that you take formal advice before proceeding, there could be tax planning opportunities using an LLP or a SPV (Ltd Company) or a trust

PeterLondon
Posts: 11
Joined: Wed Aug 06, 2008 3:49 pm

Re: EIS shares given to charity

Postby PeterLondon » Fri Feb 27, 2015 5:01 pm

Thanks if I do sell up it will be a few years ahead so I do now wish to waist anyone time with something that has no immediate business potential.

I guess my situation is that I will wish at sometime to sell up and increase my giving to charity.

I know giving shares to charity with a large capital gain is very tax effective as you get tax relief at your marginal rate
on your income and pay no CGT at all.

As you say I just called the small business advisory service and if you give an EIS share to charity it is the same
as selling it the capital gain you deferred then become payable.

If this route was an option I would of been needing a lot of tax advice as I would be seeking to find partners to
invest in EIS schemes as asset backed as HMRC would allow

I did train as an accountant (CIMA) but barely scrapped my tax exams.

As far as I am aware it is impossible to avoid CGT if and when I sell up though if there is I would at some time
be very interested.

There is something I am considering and may start another thread on this , as I mentioned my income is £150k and when I retire
I will have about £20k in a final salary scheme and about £1million in a SIP.

So I would have an income of £170k plus whatever I take as a drawdown.

I have wondered you now have absolute freedom as to how much you take out of a pension , I have though of approaching
someone like charities aid foundation.

As I said I think I would like to make charitable donations of £40k per annum.

Suppose when I retire I were to take £250k as a ta free lump sum from my SIPP and then leave a balance of £750k in my pension pot.

I suppose I could give a property to a body like CAF and reduce my income tax liability by £300k and avoid CGT.

The thing is this is more than I wish to give away and a lot more than my income.

Howevre I guess in the tax year I give away a property I could take £230 k out of my SIPP and my table income would be £400k less
£300k for the fist of a flat.

The £300k would remain with CAF and be the equivalent of 7 ish years of charity payments

Anyway I will stop there really any innovative ways that someone with large embedded gains in buy to let
property and who makes charity payments can minimise their tax bill would be of interest to me.

I will be a few years before I do this

AvocadoK
Posts: 1232
Joined: Wed Aug 06, 2008 3:46 pm
Location: Lancashire

Re: EIS shares given to charity

Postby AvocadoK » Sun Mar 01, 2015 10:15 am


I know giving shares to charity with a large capital gain is very tax effective as you get tax relief at your marginal rate
on your income and pay no CGT at all.
To get income tax relief on a donation to charity, the gift has to be a cash gift. It cannot be in the form on an investment or property. T

AK

LozaACCS
Posts: 1504
Joined: Wed Aug 06, 2008 3:55 pm

Re: EIS shares given to charity

Postby LozaACCS » Sun Mar 01, 2015 12:49 pm

IT relief is available on a gift of listed shares (not the case here) or a qualifying interest in land to charity. (Part 8 chapter 3) ITA 2007.

AvocadoK
Posts: 1232
Joined: Wed Aug 06, 2008 3:46 pm
Location: Lancashire

Re: EIS shares given to charity

Postby AvocadoK » Sun Mar 01, 2015 7:14 pm

Thanks, yes, you're right.
I suppose the EIS company could float, and then he could give the shares!!!


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