He’s made a significant gain to the tune of £2 million by selling his business. £1 million of that gain benefits from Business Asset Disposal Relief resulting in a favourable rate of capital gains tax at 10% (£100,000 due) and the remaining half, less his Annual Exempt Amount (£12,3000) is subject to capital gains at 20% (£197,540 due). With no other planning, Jin has a CGT liability today of £297,540.
Jin’s business would have qualified for Business Relief, an established relief from inheritance tax. However, the cash proceeds from selling his business will not benefit from any relief, meaning that Jin has moved from expecting no inheritance tax to be due on his estate, to expecting a significant IHT bill when he dies. He would like to put plans in place that will allow him to transfer more wealth to his family on his death.
Jin’s adviser ascertains that he’s comfortable to take on risk to meet his objectives with this area of his wealth. Jin welcomes the idea of investing in fellow entrepreneurs, especially if it could help him achieve his capital gains and inheritance tax planning goals.
What Jin’s adviser recommends
Jin's adviser suggests making two investments using the proceeds from the sale of his business.
He recommends that Jin invests a portion of his wealth that he can afford to have locked up in smaller companies for a longer period in a portfolio of EIS-qualifying companies. EIS qualifying companies will enable Jin to support fellow entrepreneurs while targeting high growth with this pot of money.
So Jin invests the amount of gain that has not benefitted from BADR (£987,700) into an EIS qualifying portfolio, which would allow him to claim up to £296,310 in income tax relief. Critically, since capital gains deferral is a valuable benefit of EIS, it would also allow him to defer the gain invested, so that £197,540 CGT otherwise payable will not be due yet.
The gains deferred in EIS companies would come back into charge when each company in his portfolio is sold, at the relevant rate of CGT at that time. As this can happen over a number of years, it might allow him to make use of multiple Annual Exempt Amounts. If Jin were to die holding his EIS investments, the capital gain deferred would be eliminated.
Jin’s adviser explains that EIS investments also qualify for business relief, which means that provided Jin’s funds are invested within three years of the sale of his business, they should be able to be left to his children free from IHT.
Jin’s adviser suggests that he invests a further £1 million of the proceeds realised on the sale of his business in Business Relief-qualifying companies to complete his estate planning. Business relief qualifying companies can undertake a wide range of qualifying trades, and options exist for Jin to target higher levels of growth or more predictable returns depending on his goals. They can also be sold if Jin unexpectedly needs access to some or all of this portion of wealth, subject to liquidity being available. Due to replacement relief, like his EIS investment, Jin’s BR qualifying investment should qualify for relief immediately, rather than needing to wait for a two-year holding period to pass.
