This is based on a real case we have dealt with, with changes made to protect the identity of the individuals.
We were introduced to a couple in their 80s who had just been notified that due to a takeover of a very large company, shares which they had held for over 45 years were going to be redeemed for cash resulting in a 7 figure settlement. The concern for the clients was that there was going to be a significant capital gains tax bill in relation to the change in the value of the shares over this very long period. They didn’t need the money as their current income exceeded expenditure however even if they gave the money away, if they were to die within 7 years it would form part of their estate for inheritance tax purposes thus creating both a CGT bill and then an IHT bill which could easily have resulted in nearly 60% of the proceeds of this windfall to be paid in tax.
After a detailed discussion with the clients about their situation, the situation of their beneficiaries and what they would want to do with the funds in the event of their death we came up with a solution. This solution offered the opportunity to alleviate both the CGT and the IHT liability and pass the assets onto the beneficiaries free of tax. In most situations whereby a solution like this can be found, there must be some form of downside and in this situation, we explained to the clients that the downside was twofold. Firstly, they had to accept that they would never be able to see their beneficiaries actually use the money for anything because unfortunately the solution involved tying up the assets until after their death. Secondly, they had to accept that whereas the tax savings are all based on noncontroversial tax planning vehicles, the tax breaks are only offered by HMRC if these investments are made into areas whereby relief is given due to the entrepreneurial or other beneficial elements of the investment. The use of an EIS is not an IHT ‘solution’ in itself but is used as a means of reducing the value of an individual’s estate after two years, rather than the normal seven years. Please also note EIS investments are considered to be High Risk investment products and may not be suitable for all investors.
The solution:
The solution in this situation was to invest the proceeds of the sale into a series of EIS investments (Enterprise Investment scheme).
How it works:
Investments made into an EIS allow any capital gain from which the original funding might suffer tax on to be deferred until the end of the EIS. Another factor to consider is that CGT is eliminated on death of the individual. Therefore, if the investment is held in an EIS until death CGT will be eradicated. Another advantage of EIS is that if the EIS is held for more than 2 years then it is outside one’s estate for IHT purposes.
How it works in reality.
Both clients were able to avoid the CGT by making the investment within the permitted period after the sale of the assets (shares). Both the clients then lived for at least 24 months after the investment was made. When one of the clients sadly passed away the beneficiaries inherited the EIS and when the EIS matured the beneficiaries were able to realise the asset with no tax payable.
Other areas in which this would work.
Although this was a particularly unique set of circumstances for these clients, we have other clients who have inherited property all who have sold 2nd properties and wish to find a way not to pay capital gains tax or inheritance tax on the proceeds. As you can imagine, this solution does not work for everybody but where it does work it is very efficient.
