It’s been an interesting and rewarding week. Occasionally I face a different type of dilemma for a client, one that makes me scratch my head, rummage around in my solution tool box and come up with something that I don’t use on a regular basis and this was the case this week.
My client Mrs R is in the fortunate position of having an extremely good pension, one that far exceeds her outgoings and so she has built up a large investment portfolio during her working years and continues to add to it in her retirement. Prior to me looking after her, she had a stock broker with whom she built up a portfolio that is heavy with capital gains. The original investment totalled £250,000 the current value being £415,000. The portfolio of shares were completely held in the UK Equity sector, although I have tried to balance the risk through diversifying her other investments into other sectors her portfolio is still far too overweight in the UK sector, which concerned me due to the level of risk this created.
Mrs R is aged 90 and now not in the best of health; with other assets valued in excess of the nil rate band she and the family were concerned about the potential Inheritance Tax liability of her estate. Cashing in her Share portfolio would crystalise the large capital gains and capital gains tax (CGT) would be payable at 28% because she is a higher rate tax payer. The other issue is her age she might not survive the full 7 years required to traditionally move money outside an estate. This could mean that she would pay CGT on encashing her shares and then the estate would still be liable to 40% inheritance tax.
The solution – sell the shares, realising the gains, but invest these gains into an Enterprise Investment Scheme (EIS).
The benefits of this is that the CGT liability is deferred for the life of the investment and if Mrs R holds it until she dies the liability will die with her. She will benefit from 30% income tax relief against her income and after 2 years the EIS investment becomes potentially exempt for IHT purposes (although there would still be a liability if she died within 2 years).
These types of investment are considered to be higher risk, however, with only the gain invested into the EIS, the original £250,000 is now available for reinvestment into a diversified portfolio that will bring down the overall risk of her investments and her portfolio will now be more suitable for her attitude to risk than it previously was. There will be no immediate liability to CGT, which will disappear on her death and if she lives for at least another 2 years another £165,000 (plus any growth) will not be liable to INT.
So a winning solution on all accounts.