EIS guide

19 RISKS AND REWARDS IHT relief via Business Relief The vast majority of EIS-qualifying investments attract 100% IHT relief via BR because the qualifying trades for EIS purposes are very similar to those which qualify for BR. However, to be eligible for the EIS tax reliefs, there are additional qualification criteria including the risk-to-capital condition. Qualification for BR is subject to the minimum holding period of two years (from the later of the share issue date and trade commencement). However the ‘replacement property’ provisions mean that a qualifying investment may also be treated as satisfying the two-year minimum ownership period. This is where it replaces (either directly or indirectly) other qualifying assets that have been disposed of. In order to qualify for replacement relief, the new investment needs to qualify as relevant business property and must be bought within three years of the disposal of the original qualifying asset. It’s also necessary that the replacement investment is still held at death (or the point of any other chargeable lifetime transfer), and that the combined holding period for both is at least two out of the last five years. To attract 100% Business Relief, ’relevant business property’ comprises: a business or interest in a business; unquoted securities that either by themselves or in conjunction with other securities or unquoted shares give their owner control of an unquoted company; or unquoted shares (including those listed on the AIM market). Example Consider a client with an estate of over £2 million, who invested £100,000 into EIS- qualifying shares and held these for at least two years prior to their death (or has held qualifying assets for at least two years within a period of five years, where replacement relief has been utilised). Business Relief is a retrospective relief in the sense that it is only assessed when a claim is made: either by the executors of the deceased’s estate or when there has been a chargeable lifetime transfer. When it comes to claiming BR, the two- year qualifying period starts when the money is used to purchase the shares in a trading company, not, for example, when the money is transferred to an EIS investment manager. There will be a lag of weeks or months between a manager receiving money and investing it on a client’s behalf, and this lag must be taken into account when determining the dates for qualifying periods. While EIS qualification brings additional tax benefits, they are usually riskier investments than those targeting BR benefits alone, with lower levels of liquidity and higher levels of fees and charges. So, if the objective is IHT relief while retaining access to the funds and the risk appetite is lower, BR should be preferred over EIS. Most EIS qualifying investments also meet the requirements for business property relief and an EIS investment would usually fall out of an individual’s estate for inheritance tax purposes once held for a period of two years. SMITH & WILLIAMSON BR qualification clock JAN FEB MARCH APRIL Funds raised and transferred to the manager Counts towards two-year BR qualification period Funds deployed to BR Shares BR qualification clock starts Relevant asset sold Relevant asset sold after ownership in 3 of last 5 years Reinvestment into relevant asset Reinvestment into relevant asset YEAR 0 YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR 6 YEAR 7 Death of holder of relevant asset Example of replacement business property OWNERSHIP OF RELEVANT ASSET BR qualification of relevant asset The relevant asset is BR qualifying as it has been held for at least 2 of the last 5 years and it was held by the deceased on death. While this works for BR qualification, EIS qualification requires a minimum, uninterrupted holding period of at least 3 years. Provided that the shares still qualified for BR at the date of death, they will be passed on to their beneficiaries without IHT being suffered in relation to the value of the EIS shares.