Changes to EIS start to bite, despite inheritance tax receipts at record high

Tax relief on investments in small privately-owned companies fell by 22%, the latest figures show.

The figures for 2016/17, the latest year available, show a 45% decline from £2.29 billion two years previously.

Business property relief (BPR) gives investors in certain assets 100% inheritance tax relief on those assets after two years of holding them, provided they are still owned at death. It applies to a range of assets, including unlisted shares and qualifying shares listed on the Alternative Investment Market (AIM), and to Enterprise Investment Scheme (EIS) holdings.

The fall in the value of BPR comes despite the fact that inheritance tax receipts have hit a record £5.4 billion for 2018/19, up from 5.2 billion in 2017/18, and showing an increase of 42% over the past five years.

Sylvia Lennon, relationship director at private equity investment firm Growthdeck, points out that there's a growing disconnect between the need for tax planning strategies to mitigate IHT and the use of what's available. "Business property relief is an important part of the tax planning toolkit. However, the falling value of relief shows it is being underused," she comments.

Ben Yearsley of Shore Financial Planning says the principle reason for the slump in use of BPR is rooted in the changes to the EIS rules in recent years, which has reduced the flow of funds into EIS.

The Cameron government in 2015 created a new test that prevents EIS being used for investment in assets that the government viewed as 'less risky', such as pubs. Companies that have been trading for more than seven years are also now denied access to EIS funding.

Further changes introduced in March 2018 included measures to make sure only higher-risk, early-stage and more entrepreneurial businesses qualify for inclusion in EISs. Previously, relatively secure, low-risk enterprises such as solar power and wind power schemes attracted a lot of investors' cash.

"EIS has become much less attractive because investors have to invest in much earlier-stage and entrepreneurial opportunities to get the tax breaks," Yearsley says.

For older investors who might previously have used EIS to reduce their potential inheritance tax bill, there are still alternatives based around BPR. These are investment planning services designed specifically for the purpose. Most invest in the significant number of AIM-listed shares that qualify for business property relief, though some focus on lower-risk 'asset-backed' BPR strategies.

However, in recent years there have been calls for these shares to lose their tax exemption status, on the grounds that BPR was never designed as a tax avoidance measure. 

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