Dermot Campbell (above), CEO of alternative fund investment platform Kuber Ventures, explains to GBI Magazine how EIS can help with Inheritance Tax planning.
It is, perhaps, inevitable that Inheritance Tax (IHT) is something about which most people only start to worry when they are nearing the end of their life. To be blunt about it, this is usually too late. In terms of IHT planning, many people are reluctant to compromise their lifestyle today in order to put their estate in a better tax position after they are gone.
The 2 most effective means of mitigating IHT are to either spend all your money or to give it all away. This issue is keeping back enough to live off for the remainder of your life without making too many sacrifices.
The big problem is that life expectancy is very difficult to judge and clients could live to a really old age. If they do, their life is going to get extremely expensive with increasing care costs. It is almost impossible to judge how much can be given away and how much should be kept back so we need a rather more sophisticated approach to IHT planning. More of that in a moment. But first, what is IHT?
It is the latest in a long line of taxes once known as death duties levied on the estate of a deceased person. Everyone has an IHT allowance, currently £325,000, and assets above that level are taxed at 40 per cent, with exceptions for money left to spouses or civil partners, charities or amateur community sports clubs.
IHT planning, beyond the aforementioned simple strategy of getting rid of all the money, can take two forms. Traditionally, putting the assets in a trust has been seen as the strategy of choice for many advisers.
Trusts carry many benefits including speeding up the time it takes to distribute assets to loved ones, however the issue is that you can’t have your cake and eat it. To be effective, trust planning still involves giving assets away, even though you may retain control of them. This means that the gifted assets are not available for later life care.
The alternative is to invest in assets which qualify for Business Relief, formerly known as (and often still referred to) as Business Property Relief.
Portfolios specifically put together to benefit from Business Relief, along with Alternative Investment Market (AIM) portfolios (which also benefit from Business Relief), are available to mitigate the effects of IHT. The advantage over trusts is that the individual retains ownership of the assets and they can be used to finance later life care if needed. The 2 year qualifying period is also extremely useful as the alternative is gifting which takes 7 years to be fully effective.
Of all the BR qualifying investment alternatives, the starting point should be Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Schemes (SEIS). Not only do they attract Business Relief, but also relief from Income Tax and Capital Gains Tax. Again, investment must have been held for at least two years.
These investments are illiquid and therefore, as an adviser, you need to consider many other factors such as the needs of the beneficiaries; advisers need to be thinking about the needs specific to their clients’ individual circumstances.
There are more liquid options out there which still qualify for BR but have less attractive tax incentives. AIM listed investments are one where liquidity is generally better. Beyond that there are other investments which qualify such as renewable energy investments and other so called BPR portfolios.
For clients who have material income tax or capital gains tax liabilities, EIS and SEIS investment makes sense within a broader IHT strategy. Whilst these investments are fairly illiquid, they offer great tax benefits plus the tantalising prospect of real financial growth. It would be foolish for advisers to neglect these opportunities – but particularly for older investors, they must be incorporated into a broader strategy with liquid investments, like shares and pots of cash. I mentioned earlier the need to consider the potential beneficiaries and what their needs are.
One final factor advisers need to bear in mind is that, earlier this year, the Treasury launched a review into IHT including the question of whether Business Relief is working as it is meant to, providing value for the economy.
Depending on the final outcome, there could be changes to Business Relief as soon as the Autumn Budget.