When talking about estate planning, a client can often be concerned about the need to restructure their estate in order to achieve potential IHT savings and, in doing so, swapping a charge on death with another charge during their lifetime.
In these situations, EIS can be used effectively to unlock the potential to restructure a client’s estate, in order to save IHT, by managing the lifetime tax liabilities that may be triggered – in most cases this will be CGT. Take, for example, a second home where CGT would be payable at up to 28%. The following case study illustrates the benefits of EIS in the context IHT planning:
Selling a second home
Mr Johnson is a higher rate taxpayer. Until recently, Mr Johnson owned a holiday home near the beach in Cornwall. It was never his main residence. To reduce the proportion of wealth invested in property, and to enable him to take steps to mitigate the potential IHT liability on his estate, he has now sold the home for £250,000, bringing him a gain of £150,000.
Investing the value of the gain into EIS shares, in this case £150,000, can defer payment of the full £42,000 CGT bill relating to the property sale (assuming he has already used his annual CGT exemption)
There is no requirement to defer the gain in full, so Mr Johnson might choose to invest a smaller amount into EIS and defer part of the gain. The deferred gain will only come back into charge when the EIS shares are disposed of. As these disposals could be across different tax years, this may offer further planning opportunities.
CGT deferral can be applied to gains that occurred in the three years before the date that EIS shares are purchased. Gains which occur in the 12 months after the EIS share purchase date can also be deferred. However, EIS CGT deferral and other EIS inheritance tax reliefs are only available once the investor has received an EIS3 certificate from HMRC. As such, it’s possible that Mr. Johnson may need to pay the CGT and then claim it back once he has received his EIS3 certificate.
As you can see, the opportunities are certainly interesting and worth investigation.
Oxford Capital is not able to offer financial advice and this blog should not be construed as advice. Tax planning and EIS tax reliefs depend on individual circumstances and are subject to change.