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 objectives of this presentation is to understand the inheritance tax planning applications of these various different investments.
These investments all offer Inheritance Tax Planning opportunities because they have the potential to qualify as “Relevant Business Property” which in turn qualifies for Business Relief against Inheritance Tax. Relevant business property can fall into 2 categories; assets that qualify for 50% Business Relief and those that qualify for 100% business relief.
Investments qualifying for 50% relief include controlling interests in listed companies, plant and machinery used exclusively in a business and land and buildings.
Investments qualifying for 100% relief are the ones that we are interested in here. These include trading businesses which could be private unlisted companies, AIM listed companies or partnership interests.
EIS and SEIS both qualify for 100% business relief after a holding period of 2 years as do certain other qualifying investments.
Non EIS investments which qualify as Relevant Business Property are often known as BPR portfolios. These include a number of businesses which would not qualify as EIS or SEIS but will qualify as Relevant Business Property. These include investments such as renewable energy or other trades which are excluded from the EIS regime because the risk is not high enough to justify the tax reliefs.
Portfolios constructed specifically to qualify for Business Relief will often have a liquidity facility built in. It is important to understand that this liquidity is not guaranteed. It is achieved in a number of ways which include Matching received funds with redemption requests, maintaining a liquidity reserve or holding liquid assets which can be sold on demand.
Most AIM listed companies also qualify as Relevant Business Property and are entitled to 100% relief, however, AIM is not as straight forward as you think.
Firstly, liquidity is achieved by what is called a Matched Bargain System which means that sale of assets is not guaranteed. The AIM market basically achieves liquidity by advertising investments for sale or purchase on its trading system. People who want to buy or sell investment simply look at the order book and if they like the price, they put in an offer. Popular shares have plenty of liquidity and can easily be sold, however, if a share falls from grace you can find there is virtually no liquidity and you can’t sell it.
AIM listed investments also cease to qualify as Relevant Business Property if they are promoted to the main market. There is one exception: if an investor holds a controlling interest in the company then they still receive 50% business relief.
Other AIM listed investment that don’t qualify are those that are not trading businesses but investment companies. They could also cease to qualify if they hold too much cash on their balance sheet.
Another important aspect to inheritance tax planning is that it is only Relevant Business Property in a portfolio that benefits from Business Relief. Cash pending investment or cash proceeds from the sale of an investment do not qualify. This could present a problem with EIS and SEIS investments if it wasn’t for another relief called Replacement Property Relief. Broadly, if you reinvest the proceeds of an investment that did qualify as Relevant Business Property but for the ownership period, and reinvest the proceeds in new Relevant Business Property, then if the client dies before the expiry of the 2 year qualifying period, their estate may be able to claim replacement property relief.
To qualify for Replacement property Relief, you need to reinvest the entire proceeds in Relevant Business Property. You cannot hold back some of the proceeds to spend and only invest some as this would require that you restart the 2 year clock although it is ok to pay the fees associated with reinvestment out of the proceeds.
This slide, though a little busy, shows the effect of replacement property quite nicely: basically if your client– has not owned the Relevant Business Property for 2 years at the date of death, you look back over the last 5 years and providing there have been 2 years of ownership in aggregate over the period than your client’s holding should qualify for Business Relief.
Replacement property rules mean that it is much better to own a portfolio rather than a single holding. The benefit of a portfolio, apart from the investment risk considerations, is that it is unlikely that all of your client’s investments will be in cash at the date of death and so the tax risk is reduced too. Also, your client will be able to spend some of the investments and reinvest others without compromising the relief.
This is less important with BPR investments than it is with EIS although there are still plenty of reasons why it makes sense to use a portfolio approach: investment risk management being the most obvious.
There are a number of different investment options open to you when it comes to IHT efficient investments: The starting point will often be EIS followed by AIM ISAs and then AIM listed portfolios.
You should only use EIS if the client can take advantage of the other tax breaks such as CGT deferral or income tax relief. The client also needs to be able to deal with the liquidity associated with EIS.
SEIS investments do have IHT benefits, however, you should use them with caution because of the increased risk associated with SEIS. One benefit is that the client may get an immediate reduction in value because an SEIS investment is unlikely to be worth book cost immediately post investment although this should change as the company gains traction. If the client dies during the first 2 years of ownership, the growth post death will be subject to CGT.
There is an important interaction between CGT and estate planning because there is no CGT on death and therefore, if you defer a capital gain into an EIS, you may never pay any tax on the gain because the CGT will be deferred and the investment will be exempt from IHT after a holding period of 2 years. You should note that any gains post death will count as taxable gains in the hands of the beneficiaries.
So to summarise, when doing IHT planning don’t be tempted to cut corners: build a diversified portfolio, using different investment structures including AIM portfolios, AIM ISAs and EIS. Top rate tax payers could also use SEIS but remember that VCTs do not count as relevant business property and therefore are not useful when it comes to IHT planning.
Using a platform will help you for a number of reasons: 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 benefits 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 accounts.
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.