Inheritance Tax Planning with Enterprise Investment Schemes
Not keen on the government gate-crashing your funeral to demand yet more tax? An Enterprise Investment Scheme may be a useful addition to your estate planning toolkit.
It’s not at all surprising that we, as a nation, are pretty much united, across the political spectrum, in our opposition to Inheritance Tax, because: -
- It’s cruel: The tax must be paid within six months of a bereavement, just when families are at their most vulnerable after losing someone they love.
- It’s double taxation: for every pound we pay into our mortgages or put into our savings, we’ve already paid a third as much again in tax and national insurance. Having already taken a big slice of the pie, should the government really be gate-crashing our funerals to demand even more?
- It punishes us for doing the right thing: Should working hard and saving to better ourselves and provide a secure future for our families be penalised?
Fortunately, families caught in the cross-hairs of this intrusive and unfair form of taxation can do a great deal to limit their exposure. With the right financial and legal advice and careful planning, Inheritance Tax can be reduced or eliminated.
Among the range of strategies available is the option of investing in an Enterprise Investment Scheme. If you work with a financial advisor, you may have heard about them, but may not be altogether clear about how they work and how they can benefit you. This is a summary to help you consider whether to explore this option further.
What is an Enterprise Investment Scheme?
Enterprise Investment Schemes are a win-win for families and businesses alike. They have been around for over twenty years and were introduced to encourage us to invest in up-and-coming businesses. Investing in small, unquoted companies is risky, so Enterprise Investment Schemes provide us with incentives to take the plunge, with protection in case things go wrong.
Enterprise Investment Schemes are vehicles for investing in small, unquoted companies, with relief from Income Tax and Capital Gains Tax, and - crucially from an estate planning perspective - protection from Inheritance Tax liability.
Relief from Inheritance Tax
If you invest in an Enterprise Investment Scheme, you own shares in small companies that are not quoted on the Stock Exchange. Shares in these companies qualify for Business Property Relief from Inheritance Tax, once you have held the investment for a qualifying period of two years.
Business Property Relief is a complete shield from Inheritance Tax, so any funds you invest in an Enterprise Investment Scheme will be exempt from Inheritance Tax.
And the good news doesn't end there.
Income Tax Relief
You get Income Tax relief of 30% when you invest in an Enterprise Investment Scheme. For every £1000 you invest, you get £300 knocked off that year’s income tax bill. You can wipe out your entire income tax bill for the year if your investment is big enough, and if the investment is larger still, you can carry surplus relief back a year, to get a discount against the previous year’s income tax bill.
For example, if you invest £20,000 in an Enterprise Investment Scheme, you can have up to £6000 wiped off this year’s tax bill. But if, say, this year’s tax bill is only £5000, you can carry the surplus £1000 back one year and have it knocked off your previous year’s income tax bill.
You must make a formal claim to get the tax relief, and it comes to you either as a tax rebate or as an adjustment in your tax code.
There is a caveat, though. You must hold on to the investment for at least three years. If you get rid of the investment in under three years, you must repay that tax saving to HMRC.
Capital Gains Tax Deferral Relief
Lots of Buy-To-Let investors are thinking about selling up and putting their money elsewhere, because of the recent tax changes that have made buy-to-let investing less attractive. But the downside is that selling a buy-to-let property can trigger a liability for Capital Gains Tax
But if you sell a house and trigger a Capital Gains Tax liability, you can defer paying Capital Gains Tax by rolling the sale proceeds over into an Enterprise Investment Scheme. Sometimes you can even make the delay permanent.
You can get Capital Gains Tax Deferral Relief if you subscribe to an Enterprise Investment Scheme, either a year or less before, or three years or less after, you sell the property.
If you want to roll a gain over into an Enterprise Investment Scheme, you must make a formal claim for Deferral Relief. You can defer as much of the Capital Gains Tax liability as you like, limited to the amount of money you put into the Enterprise Investment Scheme.
You can defer paying the Capital Gains Tax until you take your money out of the Enterprise Investment Scheme. Once you take your money out, you must pay the Capital Gains Tax at the rate that applies to that year. But if you keep your money in the scheme for the rest of your life, your heirs can inherit the funds in the Scheme without paying Capital Gains Tax.
Deferral Relief doesn't just apply to buy-to-lets; it applies to other assets sold at a profit, such as publicly quoted shares.
Capital Gains Tax Freedom
Normally, if you own shares and sell them on at a profit, you must pay Capital Gains Tax on the increase in their value. But any increase in the value of shares held in an Enterprise Investment Scheme is exempt from Capital Gains Tax. However, to qualify for this exemption, you must hold the investment in the Enterprise Investment Scheme for a minimum of three years.
What if my Enterprise Investment Scheme shrinks in value?
If your investment is worth less when you take your money out than it was worth when you went into the Scheme, you can offset the loss against either capital gains or income, thereby reducing or eliminating your Income Tax or Capital Gains Tax liability. You can offset your losses against the current and previous year’s gains and income.
Worth exploring further?
Enterprise Investment Schemes aren’t for everyone. Despite the Inheritance Tax protection and the other tax incentives, there’s no getting away from the fact that investing in small, unquoted companies is inherently risky. So, if you’re a cautious investor, or you depend on deriving a predictable income from your investments, an Enterprise Investment Scheme may not be right for you.
Until recently, many Enterprise Investment Schemes specialised in funding renewable energy companies, which were regarded as a very safe investment. However, the government recently banned renewable energy companies from being funded by Enterprise Investment Schemes. As renewable energy companies made up around a third of all companies funded in this way, their removal has made it harder for Enterprise Investment Schemes to limit risk.
So, before you decide to take the plunge, it’s important to do your due diligence and obtain quality advice from an expert financial advisor.
For help with planning a secure future for yourself and your family, fill in the contact form below or give us a call on 0151 601 5399.
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"We decided to seek advice about estate planning because we wanted to understand how to efficiently protect our assets and pass them safely to our children and grandchildren. We also wanted to put as much help in place for our family as possible, so as to make things as easy as possible for them when the time comes. We liked Gina’s patient and diligent manner in answering our questions and guiding us to the right solutions. Gina explained everything to us with great clarity, making concepts we were unfamiliar with accessible and clear. We particularly liked the fact that Gina came to see us in our own home without our having to make a special request; this is just the way she works. It was so much easier for us to relax and talk freely in the comfort and privacy of our home. Having put the right estate plan in place we feel that we have ticked a big box. This was something we knew we had to get round to. Now it is done and sorted and we don't have to worry about it anymore. We have also gained a clear understanding of the measures that have been put in place and why they are important. "
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