Clients may have been advised by their Advisors to invest in Enterprise Investment Schemes (EIS) some years ago to take advantage of the inheritance tax planning opportunities these investments offer. A number of EIS offerings will have recently exited or will be exiting shortly.
The issue is that once a contract for sale is in place, the EIS no longer qualifies as Relevant Business Property, however, there is good news in the form of a relief called Replacement Property Relief.
If you reinvest the proceeds of a sale in a new qualifying asset, Replacement Property Relief allows you to count the ownership period of the original asset towards the two year qualifying period of a new asset.
Background to Business Property Relief (BPR) and EIS
Broadly, an EIS will qualify as “Relevant Business Property” after an individual has owned the shares for a period of two years. Should they die, this allows the executors of their estate to claim 100% business relief (of Business Property Relief) against inheritance tax.
BPR has long been a stalwart of inheritance tax planning and the original aim was to allow smaller, often family-run, companies to be passed between generations, with minimal impact to the everyday running of the company. The relief has since been expanded to encourage investment in private companies.
If you sell an asset which would have qualified as Relevant Business Property, were it not for the ownership period, and reinvest the proceeds in a new, potentially qualifying asset, Replacement Property Relief means that the executers of an estate may be able to claim BPR. The conditions are such that, at the point of death, the estate must have owned Relevant Business Property for at least two out of the last five years.
Another condition is that you must reinvest the entire proceeds of any sale in qualifying assets. Paying fees associated with reinvestment out of the proceeds is allowed however, you cannot take some of the proceeds and spend them.
If you are investing in EIS as part of an IHT planning strategy, then it is important that you adopt a portfolio approach rather than investing in a single holding. In addition to the investment risk management, the benefit of a portfolio is that it reduces the risk that all of the investments will be sold to cash just before the client dies.
The diversification of a portfolio makes it likely that investments will exit at different times over a period of several years. Further, the small size of individual positions means that your client will be able to choose to spend some of the proceeds of exits without compromising the Replacement Property Relief on the rest of the portfolio.
Portfolios like this are administratively complex and using a platform like Kuber Ventures allows you to easily manage this type of planning. Platforms can assist in a number of ways including simplifying the overall investment process and giving advisers control of their clients’ investments. This adds to the value of their businesses.