Created 25 January 2016
Hello and thank you for listening to this training video on Inheritance tax planning using investment structures
Please take a few minutes to read this disclaimer as it is important that you understand the contents. You can pause the video while you do so.
My name is Dermot Campbell and I am a chartered financial planner. I am Chief Executive of Kuber Ventures Limited which offers a platform for investing in alternative investments including EIS, SEIS and other inheritance tax efficient investments.
The learning objective of this presentation is to understand how Capital Gains Tax planning works with EIS and SEIS.
To recap on the tax benefits, VCTs do not have any capital gains or inheritance tax planning applications although gains within a VCT are tax free. EIS are the most versatile of the 3 investments with CGT, IHT and Income tax planning applications.
SEIS have some valuable tax planning benefits, however these should be considered to be more of a boost to the investment than as a tax planning tool.
You can invest a total of £100,000 in SEIS each year, as well as carrying back to the previous year if you have unused capacity. You get a combination of 50% income tax relief and 50% capital gains tax relief. This means that for every £100 you invest in SEIS you get an income tax rebate of £50 and a capital gains tax rebate of £14 meaning that the tax rebate on an SEIS where you have a capital gain is 64%. If the investment fails then you get loss relief on 50p of your investments so a basic rate tax payer will get an additional 10p for every £1 invested, a 40% tax payer will get 20p for every £1 invested and a top rate tax payer will get 22.5p rebate for every £1 invested. In simple terms, this means that the total return on SIES is 74p in the £1 for basic rate tax payers, 84p for 40% tax payers or 86.5p for top rate tax payers.
The outcome of this is that you only need the investments to recoup more than 26p for a basic rate tax payer or 13.5p for a top rate tax payer. A diversified portfolio should give some great returns here and the real value of SEIS tax is to boost the investment returns.
In the case of EIS, you can defer an unlimited capital gain, which means that if, for example, you had a gain of £10m, you could invest that in a basket of EIS and defer the entire gain. The gain will be treated as being realised in the year in which you exit the EIS.
You are able to reclaim CGT already paid on a gain that you incurred up to 3 years before you invested in the EIS and any gain that gets realised up to 1 year after investment you are able to defer through the EIS. This allows you to reorder gains and losses where you have incurred a gain and then in a subsequent tax year you incur a loss.
You can also claim an additional annual tax free allowance so you will be able to benefit from an absolute tax saving of approximately £3k per annum for deferring a gain.
There is a close interaction between IHT and CGT since you do not pay CGT after you die and EIS and SEIS investments are exempt from IHT after you have owned them for at least 2 years. This means that if you defer a capital gain into an EIS and hold the EIS until you die, providing you live for at least 2 years after making the investment you should avoid both CGT and IHT.
It is important that you diversify a portfolio of EIS. Not only because of the investment risk but also because a diversified portfolio of investments should not all exit in the same year, although thiscannot be guaranteed.
Using a platform will help you build a diversified portfolio. There are a number of benefits, the main one being that it puts you in control of your client’s investments, making it possible for you to do a proper job for them.
Our platform is a simple fund platform that allows you to easily build a portfolio of investments for your client. Funds flow into the cash account on the platform, get allocated to the funds you choose for your client and the underlying investments are boughtvia a nominee and held for the benefit of your client. When an investment is sold, the proceeds flow back to the platform and you will be in a position to re-invest the proceeds.
The platform helps you by simplifying the investment process overall but, most importantly, putting you the adviser in control of your client’s investments. When you diversify you should look to diversify across the underlying positions, but there are some other important rules of diversification: look to spread the investment across different funding stages and sectors as well as different managers. If the client is in good health, consider spreading the investment across a number of vintages, or years, so that they get exposure to different parts of the economic cycle.
So, what next? Have a look at your client bank and consider which clients you should be talking to. Consider speaking to your professional connections such as solicitors or accountants.
Next, consider what strategy you are going to adopt – perhaps meet Kuber and set up your own panel of preferred investments for the next few months.
Finally, consider how you are going to market these opportunities to your clients. Maybe send out a newsletter or arrange a series of CPD workshops. Kuber is happy to help you put these together.
There is a lot of information available on the internet. Have a look at our website where you will find a host of useful material, but also browse the HMRC website which is excellent. The IHT manual or Venture Capital Schemes manuals are very useful.
Thank you very much for listening and good bye.