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Tax Talks with Ian – Enterprise Investment Schemes & Venture Capital Trusts​

Enterprise Investment Schemes & Venture Capital Trusts


Enterprise Investment Schemes (EIS) are tax-efficient schemes created by the UK government during 1994 and which have since raised over £20 billion in investment. They were designed to encourage individuals to invest in smaller high-risk companies in return for a range of attractive tax reliefs that they could not obtain via directly investing into the companies.

There are a few qualifying rules to meet the EIS requirements. Firstly, investors cannot control more than a 30% stake in any company invested through EIS and can only invest up to £2 million per year, provided anything over £1 million is invested in ‘knowledge-intensive companies’. In addition, eligible companies must have:

  • Fewer than 250 full-time employees
  • Gross assets not exceeding £15 million
  • ‘knowledge-intensive’ companies will be able to receive up to £10 million in EIS funding in a year
  • Held the shares for at least three years from the date of issue of the shares or three years after commencement of trade

There are a number of benefits which are as follows:

Income Tax

Income tax relief of 30% is available to individuals for the entire invested amount in EIS. This tax liability reduction is up to £300,000 per tax year.  Therefore, if you make an investment of £10,000 you can save £3,000 in income tax.

Capital Gains Tax

No Capital Gain Tax is payable/due on disposal of shares provided they are held for three years.

By investing in EIS qualifying shares, investors can defer Capital Gain Tax on gains realised on different assets. To be able to receive this relief, investors must subscribe for EIS shares during the period of one year before or three years after selling or disposing of the asset. Deferral relief is unlimited and can also be claimed by investor whose interest in the company exceeds 30%.

Inheritance Tax (IHT)

Shares in EIS qualifying companies will generally qualify for Business Relief for IHT purposes. Relief can be at rates up to 100% after two years of holding the investment, therefore any liability for IHT is reduced or eliminated in respect of such shares. 

Venture Capital Trusts (VCT)

VCTs began in 1995 to encourage investments into early stage companies based in the UK. Due to the risks associated with early stage investments, HMRC offered investors generous tax breaks for investors taking such risks. VCTs therefore have great similarities to EIS qualifying products, but the key difference is EIS allows direct investments into qualifying companies whereas a VCT is an investment into a trading company that then goes onto provide the start up funding.

To qualify, the VCT must satisfy a number of rules to gain investors tax relief:

  • The VCT must be unlisted at the time of investment with no plans to IPO unless it is onto AIM
  • The company must have less than 250 employees
  • The company must have been established less than seven years ago
  • Funding raised by the company cannot be more than £15million from VCT funds

Tax Relief

As mentioned, in order to encourage investors to take VCT risk HMRC offer tax reliefs, including:

Income Tax

Similar to EIS investing, you receive 30% income tax relief on the amount you invest, but shares must be held for five years as opposed to three with EIS. It is also important to the note the maximum amount eligible for tax relief is £200,000.

For example, if you invest £10,000 into a VCT, £3,000 will be taken off your income tax bill at point of completing your tax return.

Dividends received via VCT’s are also tax free

Case Study 1: EIS recommendation

A long term client of ours, who is a high net worth client and running his own Ltd Company, was looking at reducing the amount of tax he pays whilst also experiencing an investment. Before recommending this type of product we had to ensure he understands the risks especially the illiquidity nature and we had to account for how experienced he was with these types of unregulated financial products. These products although offering tax incentives, are not covered by FSCS (Financial Services Compensation Scheme) nor can the client complain to the Ombudsman. After taking the above into account, we recommended a £10,000 investment into one of our EIS schemes. As this was his first experience investing with an EIS, we only recommended a relatively small amount to start off with and to ensure he still maintains a suitable emergency fund and enough cash that is not locked in an investment. During his next tax return, he was able to obtain tax relief at 30% of his investment which was £3,000 of his £10,000 investment.

Case Study 2: VCT recommendation

A high net worth client of ours aged 61, was in the process of winding down for retirement and was targeting an income of £5000 per month. After performing our necessary due diligence in ensuring he understands the risks that as those mentioned above, we recommended a VCT as one of the investments to achieve this. He had already fully utilised his ISA allowance, was already invested in structured products and peer to peer lending so we recommended a VCT as the next investment. He was also looking at a tax relief investment which the VCT would provide along with capital gains free growth and tax free dividends, the latter of which could be used to provide an income. The VCT also allowed for another avenue of diversification in his portfolio.

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Tax talks with Claire – Inheritance Tax Planning

Inheritance Tax Planning

Inheritance Tax (IHT) is a sensitive subject and one that you should be considering and thinking about even throughout the early stages of your lifetime. Your early years are deemed your accumulation phase as this is where you will see the majority of your wealth building.

IHT can be due on an individual’s estate when they die if their estate is valued at more than their available nil rate band (£325,000 in 2019/20). Your NRB is reduced by any non-exempt transactions made in the seven years prior to death. A range of IHT exemption are available to reduce your IHT liability; I am going to discuss benefits and drawbacks of trust planning.

A trust is a way of managing assets (money, investments, land or buildings) for people. There are different types of trusts and each taxed differently.

Trusts involve:

  • the ‘settlor’ – the person who puts assets into a trust and stipulates the terms of the trust
  • the ‘trustee’ – the person who manages the trust and ensure compliance with the settlors wishes
  • the ‘beneficiary’ – the person(s) who benefits from the trust

Trusts are set up for a number of reasons, including:

  • to control and protect family assets
  • when someone’s too young to handle their affairs
  • when someone can’t handle their affairs because they’re incapacitated
  • to pass on assets while you’re still alive
  • to pass on assets when you die (a ‘will trust’)

Gifting to a Trust

Gifting to the trust has a tapering allowance against IHT, demonstrated through the following decreasing basis:

For an investment of £325,000 (maximum gift each 7 years without incurring a lifetime charge); your IHT liability would be £130,000 at 40%, if you gift it to a trust you would see the following reductions:

 Trust Options

Family Gift Trust (FGT)

Probably the most traditional method of reducing IHT liability, but still hugely popular and very effective having stood the test of time is a lump sum gift into a family gift trust. We feel this could be hugely beneficial to many individuals, as we could place some savings into this trust to start the 7-year clock and take it outside of your estate for IHT purposes. You can only gift up to the nil rate band in any 7 year cycle without incurring an immediate 20% IHT liability (lifetime rate).

Positives: Simple and traditional form of IHT mitigation.

Negatives: Seven Year clock must be survived, and the control of money is lost. 

Gifting Outside of Normal Expenditure

While the lump sum Family Gift Trust option mentioned above is certainly the most traditional and vanilla method of reducing an IHT liability, we will now move on to discussing more tailored uses of Trusts and allowances.

The first of these methods is “Gifting outside of Normal Expenditure”. With this method you would regularly and continuously use excess income to gift, there is no seven year clock. Assets gifted outside of your expenditure are considered immediately outside of your estate.

This option only allows for regular gifts to be made when they are from income and the value transferred leaves you with sufficient income to maintain your usual standard of living. It is particularly appropriate for high earning individuals who can afford to gift a larger amount on a regular basis.

Positives: No need for lump sum to be gifted away. This is a progressive method of IHT mitigation, and the money gifted is immediately outside of estate. 

Negatives: Control of money is lost.

Annual Allowance Gifting

Another key strategy is to utilise the individual annual exemption. The first £3,000 of an individual gift in a tax year is immediately exempt from IHT. The exemption can apply to transfers into trust as well as outright gifts. The exemption can cover a single gift or several gifts up to this amount. It can also cover the first part of a larger gift. Once the current tax year’s annual exemption has been used, it is possible to bring forward any unused annual exemption from the previous tax year.

Positives: Effective and efficient way of utilising an annual allowance.  

Negatives: Limited to £3,000 per year.

Flexible Loan Trust

This method is not as commonly used as the previous Trust strategies, however it continues to be a viable option, especially whereby a Lump Sum is looking to be gifted away, and an ongoing income is sought.

This method encompasses the following key steps:

  • Lump sum of money is loaned to a Trust
  • The Trusts invests this money inside an Investment Bond
  • As the money has been given as a loan, it effectively freezes the IHT liability on this amount.
  • All growth on the money invested belongs to the trust, and not to the lender.
  • The loan can then be paid off over time, ideally when income is required. Thus the money received back from the Trust would be used and not retained in the estate.

Overall, this can be an effective option in order to “freeze” ones IHT liability on a sum of money.

The Flexible Loan Trust is an effective estate-planning solution for clients who wish to achieve IHT savings over time and wish to have continued access to their original capital. Even though a discretionary trust is established, there are no immediate IHT consequences to consider. 

Positives: Allows growth to accrue on investable assets outside of the estate instead of building additional wealth.

Negatives: The capital used to loan to the trust falls back into the estate at the date of death.

If any of these options discussed are of interest to you or you are just starting to consider the impact IHT could have on you and your loved ones then please get in contact with us for a free initial consultation.

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Tax Talks With Greg – Tax Allowances for 2019/20

Tax Allowances for 2019/20

We wanted to simplify the tax changes and allowances for you so here’s one easy place to look.

Dividend tax rates

There is no change to dividend tax rates in 2019/20:

  • The tax-free dividend allowance is £2,000
  • Basic-rate taxpayers pay 7.5% on dividends
  • Higher-rate taxpayers pay 32.5% on dividends
  • Additional-rate taxpayers pay 38.1% on dividends.

Pensions contributions receive full income tax relief, this means it only costs basic rate taxpayers £80 to save £100 (20 per cent tax relief) while higher rate taxpayers only need to pay £60 to save £100 (40 per cent tax relief).