Advisers whose clients need long-term tax planning could consider using VCT and EIS to help with this.
According to John Glencross, chief executive of Calculus Capital, the tax reliefs from EIS and VCTs, many of which are outlined in the first article in this guide, are “an important part of the tax planning toolkit”.
He explains: “For example, VCTs pay tax-free dividends. VCTs and EIS can be used to offset income tax liabilities, including in preceding years for EIS.
“EIS investments allow investors to defer capital gains tax on other investments or reduce the value of a person’s estate for inheritance tax purposes.”
EIS investment provides 100 per cent exemption from inheritance tax (IHT) because of business property relief (BPR). “Therefore”, says Jason Hollands, managing director for business and communications at Tilney Bestinvest, “EIS can be used as part of an IHT mitigation strategy.”
How it works: after two years, EIS investments qualify for BPR, which means they become exempt from the investor’s estate for IHT purposes.
According to HM Revenue & Customs, BPR reduces the value of a business or its assets when working out how much IHT has to be paid.
Any ownership of a business, or share of a business, is included in the estate for IHT purposes. Investors can get BPR of either 50 per cent or 100 per cent on some of an estate’s business assets.
Investors get 100 per cent BPR on a business or interest in a business and shares in an unlisted company - so EIS investments qualify for this relief.
Hugi Clarke, infrastructure investment manager for Foresight Group, comments: “BPR offers a simple and expedient means of reducing IHT.”
He outlines these as follows:
■ Speed: Assets are exempt from IHT after two years rather than seven (as in the case of trusts).
■ Control: Investors retain access and control of their investments for the remainder of their lifetime, versus a loss of access and/or control in the case of gifting and trusts.
■ Simplicity: An EIS investment can be considered ‘just an investment’, meaning there are no complicated legal structures or tax considerations, while many alternatives require one or both of these.
■ Accessibility: There is no reqirement for medical underwriting, no age limits, and no change of ownership associated with BPR, meaning such an investment can be suitable for those of advanced years, in ill health or under enduring power of attorney.
However, BPR should not be the primary reason for using this investment vehicle. “First and foremost, investors should understand it is is the investment strategy which should drive their choice of EIS, not any IHT benefit”, says Mark Brownridge, director of Mazars.
“But the powerful combination of tax relief, potential investment returns and IHT exemption does make them excellent tax-planning tools, particularly since the changes to dividend tax and the personal savings allowance.”