Advisers bracing for big tax changes

It provides relief from IHT on the transfer of relevant business assets at a rate of 50 per cent or 100 per cent. 

Nick Bird, business development manager at Octopus Investments, said: “BPR is a great way of adding tangible value to your clients in estate planning.”

Octopus Investment’s ‘untangling IHT’ guide provides some situations where clients comfortable with the associated risks could benefit from BPR-qualifying shares for IHT planning.

Transferring Isas into an Isa that is invested in BPR-qualifying shares provides IHT exemption on the Isa portfolio after two years. 

Other types of client that could benefit include those with a power of attorney in place.

VCTs are a very diverse vehicle. They should form part of an adviser’s toolbox.--Hugh Rodgers

BPR-qualifying investments may be a suitable investment where gift or trust transfers are restricted or prohibited under court of protection rules.

Broadly speaking, investments in the following kinds of businesses that carry on a trade rather than investment activities could qualify for BPR: shares in qualifying companies that are not listed on any stock exchange; shares in qualifying companies listed on the Alternative Investment Market; and an interest in a qualifying business, such as a partnership.

The enterprise investment scheme is an initiative that can provide 100 per cent exemption from IHT since, after two years, EIS investments qualify for BPR.

Changes introduced in the 2017 Budget tightened the rules around the types of companies that can be invested in through the EIS as former chancellor Philip Hammond sought to encourage investment into knowledge-based companies, rather than asset-backed businesses.

VCT popularity grows

Meanwhile, despite undergoing some changes, venture capital trusts – another government scheme designed to direct capital into small UK businesses to help the British economy grow – have risen in popularity over the past 18 months, surpassing the EIS.

Hugh Rodgers, director at Tax Efficient Review, said this was because people had “hit the buffers” with what they could do in terms of pension contributions; therefore they could use VCTs to mitigate their income tax bill.

Both VCTs and the EIS are eligible for 30 per cent income tax relief. While an investor has to hold an EIS for three years to be eligible for tax relief, it is five years for a VCT.

However, as VCTs are listed on a secondary market, this means they are, in theory, regarded as more liquid than EIS investments.

VCT dividends are also tax-free, while EIS dividends are taxable.

Both EIS and VCTs are exempt from capital gains tax on sale of shares; for the EIS the exemption applies after three years, while there is no holding period for VCTs.