When I meet with a client who is looking for Inheritance Tax (IHT) advice there are a number of possible solutions I may recommend and so I thought it would be useful to discuss them.
In this the third of my series of articles, I consider the Enterprise Investment Scheme (EIS) solution.
Let’s look at what benefits an EIS might offer you?
Alongside traditional ways to reduce IHT, EIS offers a more flexible if higher risk option. The main features are:
- EIS encourage individuals to invest in private companies, which tend to be smaller and higher-risk
- Individuals are allowed to invest up to £1 million per year in EIS-eligible investments and receive relief against their income tax bill at a flat rate of 30 per cent, effectively creating a £300,000 tax rebate for every £1 million invested
- To qualify, the shares must be held for at least three years
- Once the EIS investment has been held for two years it will normally qualify for business property relief, which means it will be excluded from your estate for IHT purposes and can be passed on free of tax
- EIS also allows you to defer capital gains tax (CGT) on previous gains provided they are channelled into EIS-qualifying investments. Any outstanding CGT liability lapses on death
A two-year time frame for reducing IHT liability compares very favourably with gifts which take seven years to be fully sheltered. Up front income tax relief is an additional attraction and you still retain access to the capital should you require it.
The Detail
First, it should be noted that EIS normally forms part of an overall IHT planning solution and carries a high degree of risk. It should also be considered alongside your wider investment strategy. It can however, provide a suitable solution for clients who are already in poor health and or at an age where the more traditional solutions that rely on a 7-year period may not work. It is also particularly attractive if you have capital surplus to requirements.
It is important to understand that the timeframe of 2 years may actually extend beyond this, as these types of products are invested in tranches usually every three months. The 2-year clock commences from the date of investment, not EIS subscription. Also, once you qualify for the exemption from IHT it will cease should you subsequently close the investment for any reason.
Due to the inherent risks of this type of product it is very important to carry out due diligence on providers, understand the risks of each product and then diversify your investment between more than one provider (depending on the sum invested).
At Richmond House Wealth Management, we undertake the above analysis to ensure our clients receive the most suitable solutions.
There are other solutions for mitigating the effects of Inheritance Tax and this article is just considering one of many. Watch out for my next article in this series.
As this is a specialist area of advice it is important to seek out this information from an appropriate financial adviser. Richmond House Wealth Management has this specialist knowledge and are always available to answer your questions.
John Merrifield.
Dip PFS, Cert (CII) MP.
This information is provided strictly for general consideration only. No action must be taken or refrained from based on its contents alone. Accordingly, no responsibility can be assumed for any loss occasioned in connection with the content hereof and any such action or inaction. Professional advice is necessary for every case. It does not constitute legal or tax advice and must not be treated as such. All statements concerning taxation are based on our understanding of the current law and HMRC practice, and proposed changes, as at the date of publication. Levels and bases of, and reliefs from, taxation are subject to change. The provision of advice in relation to taxation is not a regulated activity. The value of investments can fall as well as rise and you may not get back the full value of your investment. Your capital is a t risk. Enterprise Investment Schemes are not covered by the Financial Services Compensation Scheme.