BR Guide FINAL 20 Feb

65 64 A PRACTICAL ROUTE TO BR A PRACTICAL ROUTE TO BR CGT and Income Tax Investors will need to declare any income they receive from their investment as part of their tax return, and if they were to sell the shares at a profit they may be liable for CGT, depending upon their personal circumstances. Likewise, if the shares are inherited, when a beneficiary sells shares that previously qualified for BR for IHT purposes, they will be liable for any CGT due. Any gain they make will be based upon the difference between the value of the shares at the death of the original investor, and the proceeds from the disposal made by the beneficiary. Depending upon their personal circumstances, the beneficiary may also be subject to income tax on any income they earn while holding the shares. In the right circumstances, BR assets which also qualify for the Enterprise Investment Scheme (EIS) and Seed EIS (SEIS) can be used to offset income tax and CGT and defer CGT liabilities. 6.1 Entrepreneurs’ Relief The level of any CGT liability will be reduced if Entrepreneurs’ Relief is applicable. In April 2016, Entrepreneurs’ Relief was extended to external investors in unlisted trading companies. Now known as “Investors’ Relief”, this relief applies a new, lower CGT rate of 10% to gains accruing on the disposal of ordinary shares in an unlisted trading company held by individuals. This relief will apply to some BR qualifying investments, allowing investors’ beneficiaries to potentially mitigate IHT and pay a lower rate of CGT on disposal of the shares. One of the main qualification criteria is that the person selling the shares must have at least 5% of shares and voting rights in the company. The Autumn 2017 budget announced a spring 2018 consultation into how access to the relief might be given to entrepreneurs whose holding in their company is reduced below the normal 5% qualifying level as a result of raising funds for commercial purposes by means of issues of new shares. The intention of this is to ensure that entrepreneurs are not discouraged from seeking external investment through the dilution of their shareholding. This will take the form of allowing individuals to elect to be treated as disposing of and reacquiring their shares at the then market value. 6.2 6.3 RELIEF/WRAPPER Entrepreneurs ’ Relief RATE OF RELIEF CGT is applied at 10% MIN. HOLDING PERIOD 3 years* WINDOW OF OPPORTUNITY The shares must have been issued on/after 17 March 2016 MAXIMUM LIMIT Lifetime cap of £10m FURTHER CONSIDERATIONS Applies to investments in unlisted trading companies, many of which may also be eligible for BR ENTREPRENEURS’ RELIEF Technical Points Although the qualification rules may seem simple, it’s still worth looking at some of the technical points that advisers need to know and that could exclude an investment from BR qualification or create other potential issues. Inflation Rates & Gearing Some BR products may have a positive correlation to inflation and see an increase in their returns when inflation rises. Products that use gearing, but with underlying assets that have a negative correlation to inflation, would see an increase in their cost of borrowing, without a concurrent increase in the return from their underlying investments. Timing of Deployment The two-year BR qualifying period only starts when the money is fully invested into qualifying companies. In other words, the investment may not qualify for the IHT relief after two years if the money has been held in a custodian’s account for an extended period of time. Each new contribution takes two years to achieve IHT relief: if an investor chooses to “top up” their BR qualifying investment, then that new investment will require a further two years before it qualifies for relief. Information about the usual timing of investment can generally be found on an offer’s application form or brochure under the ‘how to invest’, ‘application process’ or ‘what happens next?’ sections. Note that two different BR services offered by the same manager can have different timing of investment and the investment manager may not be able to invest as quickly as hoped, and may not be able to identify a suitable number of potentially BR qualifying investment opportunities. This may reduce the return on investment or increase the time taken for the investment to qualify for BR. Excepted Assets As an anti-avoidance measure, any assets (including cash) within the business that are not either: • Used wholly or mainly for the purposes of the business concerned throughout the two years preceding the transfer to the beneficiary; or • required at the time of the transfer for future use for the purposes of the business are “excepted assets” and will not qualify for BR. However, unlike the 50% condition for the business’s activities, relief is still granted on the remainder of the business’s assets. For example, if excepted assets accounted for 20% of a business’s value, only 80% of the business would qualify for BR. Simply holding cash in reserve to guard against a downturn is not considered a specific commercial justification. Anti-Avoidance DEBT AND ANTI-AVOIDANCE If a debt has been raised in order to purchase a BR product, there are anti-avoidance provisions that negate the value of such planning: the debt does not reduce the value of the estate. The liability attaches to the qualifying assets, and only any value in excess of the debt is exempt The Practical Route to BR SOURCE: BANK OF ENGLAND INFLATION REPORT, NOVEMBER 2017 6 5 4 3 2 1 0 1 2 + - 2013 14 15 16 17 18 19 20 PERCENTAGE INCREASE IN PRICES ON A YEAR EARLIER *Starting from the later of 6 April 2016 or the date of acquisition of the shares.