You may have seen my video blog on Sapphire’s website where I give a high level overview on the incentives offered by the Enterprise Investment Scheme (“EIS”) and the Seed Enterprise Investment Scheme (“SEIS”). I now want to delve into a little bit more detail on their Inheritance Tax Relief (“IHT”) incentive as David Bowie’s carefully orchestrated departure from our world got me thinking a little more about the importance of planning for the end. Because we all know that death and taxes are unavoidable, the relief offered by the schemes on estates makes investing in these products relevant to a much wider population than what you might have originally thought.
It really is important to understand that the schemes aren’t just for the people who fall in the additional rate band (i.e. top tax bracket) that want to minimise the 45% tax rate hit. We all can benefit from at least knowing that investing in SEIS and EIS companies could be something we would want to explore as part of our estate planning, and it’s never too early (or too late) to make plans for this. Not to be too morbid, but you never quite know when you could be run over by a bus; this risk needs to be kept into consideration particularly if investing actively for either passive income or retirement purposes. It should come as no surprise that a lot of people don’t have a formal pension, but rather rely on investments to provide for their golden years, their families, and their legacies. This makes ensuring investments are optimised and protected ever more important.
How IHT Relief works
Provided that SEIS or EIS shares have been owned for two years, investors will be able to avail of Inheritance Tax Relief. This applies to both lifetime gifts and shares in the person’s estate. In some circumstances the shares don’t even have to be owned for two years! Inheritance Tax Relief is considered to be a form of Business Property Relief (“BPR”), as the relief is offered by the government to assist family enterprises in continuing through the generations. The way it works is that Business Property Relief excludes schemes' shares from the person’s estate, and therefore these investments do not get exposed to the very high 40% inheritance tax rate which is imposed on monies over the nil rate band amount (currently at £325,000, but to be increased to £425,000 in 2017/2018). It should be noted that the relief is no longer available should the company subsequently list on the Alternative Investment Market as the exchange is not recognised for enterprise investment scheme investment purposes.
We can all appreciate that it is not easy to time our deaths like David Bowie did, but we can be aware of the incentives out there and try to make decisions as best informed as possible. Should an investment no longer become suitable for estate planning purposes other alternatives may need to be considered and switched into (if it is time appropriate of course), which would preserve the BPR incentive; alternatives such as investing in an ISA which would qualify for such relief may need to be considered. Additionally, BPR qualifying AIM stocks have also become available and popular and they could provide an alternative investment option, either as a separate investment or as part of an ISA portfolio.
SEIS/EIS company management considerations
For all the entrepreneurs reading this, I would suggest careful consideration be given to the profile and attributes of your investor base. Making sure that your company’s investors who come on board during the early stages understand fully the enterprise’s goals and objectives is key to ensuring that investors’ interests are consistent with business strategy. By taking time to doing this through the development of a well thought out and thorough business plan at the beginning will reduce the chance of having to deal with conflict down the line; relations will be smoother as they will be more transparent.
AIM listings commonly feature as a 5+ year plan goal in a start-up’s lifecycle and businesses should take time to explore the benefits from early on that such a progression would entail (refer my prior blog about AIM listings titled “The Benefits of AIM to companies and investors”). But you should also keep in mind that an AIM listing is not the only form of exit for a(n) S/EIS company. A trade sale, a disposal to third party investor(s), or a management buyout should be considered particularly if the initial investors seek to continue their support of the company and they value upholding their IHT incentivisation.
So lets take inspiration from the starman and start planning out our legacies from now.