Estate Planning Guide

EIS The EIS is a long-standing government initiative to encourage investment into small and medium sized businesses. EIS brings generous tax benefits, but they are usually riskier investments, with lower levels of liquidity and higher levels of fees and charges compared to investment in larger companies and shares traded on the main market of the London Stock Exchange. The potential EIS tax reliefs, subject to a three- year period of holding the shares (after the commencement of a qualifying trade) on the first £1 million * invested in any tax year: • 30% IT relief on investments of up to £1,000,000 per tax year (limited to the amount that reduces the individual’s income tax liability to nil). • 100% CGT relief for any gains made on qualifying shares. (For CGT relief to be available IT must have been claimed and received and must not subsequently have been withdrawn.) • Loss relief against IT or CGT for losses made on disposals at any time. This can be set against the investor’s IT in the year of disposal or the previous year, or against CGT in the year of disposal or carried forward. Individuals may elect to treat their investment in EIS shares, up to their maximum annual allowance, as if made in the previous tax year, thereby effectively carrying income tax relief back one year. In other words, up to £2 million may be invested of which £1 million could be applied to the previous tax year. * For investment in “knowledge intensive” companies, the annual limit will be increased to £2 million, provided that any amount over £1 million is invested in “knowledge intensive” companies. This is expected to apply for investments made on or after 6 April 2018, subject to State-aid approval. New death and ISA Rules In 2015, the Additional Permitted Subscription (APS) was introduced which allows a surviving spouse to inherit a one-off additional ISA allowance equivalent to the value of the deceased’s ISA at the time of death. It became clear that this could create issues where the funds within the ISA are not left to a spouse or civil partner. In this instance, those funds may be subject to IHT as part of the deceased’s estate. Also, during probate (dealing with a deceased’s estate) which can take some time, for distribution purposes, the money is removed from the ISA. In this period, the value of the ISA could grow but the growth isn’t tax-free. But, from 6 April 2018, the rules changed so that when the investor dies, their ISA becomes a ‘continuing account of a deceased investor’ or a ‘continuing ISA’. No money can be paid into it from this point, but it will continue to benefit from the tax advantages of an ISA, so growth will remain tax-free. The APS has also changed to the value of cash or investments passed on, or the value of the ISA on the date of death – whichever is higher. There is also unlimited CGT deferral potentially available if the EIS shares are bought within one year before or three years after the disposal which gave rise to the gain being deferred. There is no minimum holding period for the EIS shares – instead, the deferred gain is brought back into charge when the EIS shares are disposed of. Hence, EIS has an obvious planning advantage in the potential ability to defer gains again and again until the investor’s death. Where an individual owns an EIS qualifying investment at the time of death which has been used to defer a capital gain, the deferred gain is not brought back into charge and no CGT will be due on subsequent disposal. However, there are restrictions to qualification which are subject to the legislation in force at the date the shares are issued. Withdrawals during the three-year minimum holding period would result in relief being withdrawn and a business established with a particular exit in mind is unlikely to qualify for EIS relief. EIS qualifying investments (comprising shares in unquoted trading companies) will generally qualify for BR, subject to the minimum holding period and any ‘excepted assets’. Once an exit has been achieved, if the BR is to be preserved, the investment must be rolled over to a new BR qualifying investment within the ‘replacement business asset’ window of BR (as explained in Section 2.6). The most recent changes to EIS were announced in 2017, with the Autumn 2017 budget in November 2017, and The Finance Act 2018 which was enacted on 15 March 2018. These introduced a principles-based test to ensure that EIS investments pose a genuine “risk to capital” rather than simply being a de-risked method to access tax reliefs. The aim is to remove investments with a prevailing focus on capital preservation from the EIS qualification roster and to funnel more money into growing, innovative firms. EIS qualification EIS qualification is subject to the shares being fully paid up in cash before being issued and they must be full risk ordinary which: • aren’t redeemable; • carry no preferential rights to assets or dividends. The following key criteria must also be fulfilled by the company: • It must not be listed on the London Stock Exchange or any other recognised stock exchange at the time the shares are issued or at any time during the relevant three year minimum holding period. • Gross assets of no more than £15 million before the EIS investment and no more than £16 million afterwards. • 250 or fewer employees (fewer than 500 for knowledge intensive companies). • Carrying on a qualifying trade (or qualifying Research & Development). Non-qualifying trades are similar to those in BR, with the addition of all energy generation activities. • The capital injected by EIS investment must be employed within the trade within two years. • Maximum EIS fundraise in a 12-month period is £5 million (£10 million for knowledge intensive companies). • The maximum lifetime limit for the investee company for all risk-finance investments (including EIS) is £12 million (£20 million for knowledge intensive companies). 57 56 ESTATE PLANNING OPTIONS ESTATE PLANNING OPTIONS