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Enterprise zone

How investing in an enterprise investment scheme portfolio can help a client minimise their tax liability

the foresight to invest £5,000 in a top-performing unit trust in 1977 which is now worth around £396,000. I want to sell this but it will give me significant tax problems. How can I minimise both my CGT and IHT liability? I am prepared to be speculative with this due to my other available capital and resources.

Sometimes it seems that clients would like us to perform miracles in addition to having their cake and eating it. No matter how unfeasible the question may seem, with a little creativity, there are possibilities.

Consider the following concept using currently available tax breaks. It may only work for a small number of wealthy individuals but does appear to meet all the above client’s objectives and uses currently approved tax planning vehicles.

Having calculated the capital gains tax liability on the sale, assuming, of course, that the value received on the sale was indeed £346,000, about £130,000 is free from tax as a result of taper relief and indexation allowance. Consider putting this in an IHT tax-efficient Aim portfolio. If the client survives two years after investment, this falls outside his estate for IHT purposes – a 40 per cent saving.

But this still leaves around £216,000 which is potentially liable to CGT of around £86,000.

Therefore, invest £216,000 into an enterprise investment scheme portfolio. Provided the EIS scheme meets all the relevant criteria for investment as dictated by the Revenue, then, under current regulations, the CGT liability is wiped out upon death – a 40 per cent saving on this, too.

Do not overlook the £43,000 (20 per cent) income tax reclaim.

Move this £43,000 tax reclaim into an IHT Aim portfolio, too, so that he has his original £130,000 plus £43,000, that is, £173,000 in his IHT portfolio in total.

In summary, the value on death after a two-year holding period is £173,000 plus £216,000 which equals £389,000 and this is assuming zero investment growth (here it is in the hands of the relevant investment managers). Therefore, there is a potential saving of over £150,000 when investing in the EIS and IHT portfolios as opposed to the inertia alternative which means that the value on death after two years if he kept his original unit trust investment, £396,000 less 40 per cent IHT £158,400 = £237,600 value (assuming fund growth of 7 per cent a year).

EIS scheme features

There is unlimited CGT deferral on realised gains – up to one year pre-gain and three years post-gain – and 20 per cent income tax relief on first £400,000 invested each year.

If you invest in EIS qualifying shares during the first six months of the tax year (by October 5), you can treat up to half of the value as being invested in the previous year and claim income tax relief accordingly, subject to a maximum carryback figure of £50,000.

On death, if there is a chargeable transfer for IHT purposes of qualifying shares which have been held for two or more years prior to death, business property relief may reduce the value of the transfer to nil for IHT purposes.

This information and concept is based on our understanding of current legislation and regulations that are subject to change.

The investments will need to be kept in force until death in order to fully remove the capital gains tax liability.

The investment manager chosen will not guarantee future returns and the client may not get back the full amount invested.

The client must have sufficient cash deposits with which to make this investment and must be aware that these assets are not readily realisable.

To qualify for both 20 per cent income tax relief and 40 per cent capital gains tax deferral, these investments should be held for a minimum term of three years. On redemption of the EIS investments, the original capital gain will become payable.

Investments in Aim companies may be difficult to sell as liquidity in this market is narrow.

The tax relief available may change at any time.

EIS-qualifying shares also qualify as business assets and have the potential to offer 100 per cent relief from inheritance tax through business property relief.

There is no guarantee that the investments will qualify or continue to qualify for the tax reliefs.

In summary, provided that the managers of the EIS scheme and IHT Aim portfolio can find suitable and quali- fying companies and assuming that there is no U-turn on the current tax legislation that would affect this, then we have significantly improved the client’s CGT and IHT position.

Yvonne Goodwin is associate director at Pearson Jones

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