Sarah Wakefield, Business Development Manager at Oxford Capital uses a case study to highlight the importance of strategic planning to maximise EIS Tax Reliefs for clients.
Planning for retirement is something that your clients are likely to be thinking about frequently, and who can blame them when there is so much to be considered? EIS could provide a tax-efficient wrapper for their investments and help build a more diversified portfolio. It will also allow your clients to plan for the unexpected, such as government changes to tax rates or a sudden bereavement – a situation which will be discussed within this article in more depth.
When reviewing your clients’ goals in relation to their retirement, planning may involve the sale of a business. Whether this is to other shareholders, family members or offering to the market – possibly as a trade sale – there can be significant tax implications that will impact your client and their ability to realise their retirement goals.
Pre-sale considerations:
The impact of the move from Entrepreneurs Relief to Business Asset Disposal Relief in March 2020 meant the lifetime limit was reduced from £10million, under the old Entrepreneurs Relief, to only £1million under the new Business Asset Disposal Relief. For some this may mean they have already used their lifetime allowance, so any sale will now be subject to Capital Gains Tax at the normal rates. Assessing the potential liability ahead of time will allow advisers to discuss planning opportunities such as deferral relief with their clients.
An example case study on why planning is key for the sale of a business was highlighted in the case of Swain Mason versus Mills and Reeve, whereby Mr. Swain sold his significant shareholding only to pass away following heart surgery shortly after.
The implications of this were that his executors were faced with a significant Inheritance Tax liability, which could otherwise have been planned for in advance.
Both the CGT and IHT implications of a company sale would need to be considered, but with the right tax planning strategy could potentially be reduced or eliminated.
Planning using EIS tax reliefs
Investing into an EIS up to 12 months before a gain is made will allow the investor to claim Capital Gains Tax deferral relief, however many EIS providers will take a period to deploy, so engagement 18 months before the gain may be sensible in order to allow for the provider’s timeframes.
Combining the Capital Gains Tax deferral with the Income Tax relief of 30% would make full use of all reliefs available to the majority of clients. EIS will allow Income Tax Relief to be claimed in the tax year of investment, or the relief can be carried back one tax year.
This pre-sale planning can prove to be far more financially beneficial when compared to leaving the planning until post-sale. (Assuming your client is using all available reliefs).
Income Tax relief is based on the tax year on which the investment is made, and the income tax liability that arises within it.
For Capital Gains the deferral period is set from the date the gain is made rather than which tax year the gain occurs.
For Inheritance Tax, Business Relief on the shares will be attained after 2 years, providing the shares are also held upon the client’s death. Although, replacement relief can be claimed immediately if the proceeds have come from a sale which had previously qualified for Business Relief and are used to purchase new Business Relief qualifying shares within 3 years of sale and before death.
Therefore, understanding these timescales, as well as the period required for the EIS investment to be fully deployed, is important in order to maximise all reliefs available, and to manage your clients’ expectations. This case study highlights the need for planning when a potential gain is on the horizon, as opposed to leaving it until after the gain has been realised. It also allows your client to ensure that should something unexpected happen, their executors will not be left with a large tax liability, as well as allowing them to use the reliefs available through EIS investing to offset their own tax liabilities within recent tax years.
Sarah Wakefield, Business Development Manager, Oxford Capital
Sarah is responsible for building and maintaining relationships with financial advisers. She has worked in financial services for over 25 years, the last 15 years has been spent building trusted relationships with IFAs supporting them with tax planning solutions. She is progressing towards becoming a chartered member of the CII.
