Both EIS and SEIS shares can be IHT efficient investments to hold at the date of death, as they often qualify for Business Property Relief (s.105 IHTA 1984) by virtue of being shares in an unquoted trading company. So, provided the shares are held for the minimum two-year period of ownership (s.106 IHTA 1984) they could be free from IHT.
Income tax relief of 30% for qualifying EIS investments (s.158 ITA 2007) and 50% for qualifying investments (s.257AB ITA 2007) into smaller SEIS companies can also be an incentive. The income tax relief obtained is usually withdrawn if the shares are disposed of during the qualifying period, which is 3 years from the issue of the shares (s.209/257FA ITA 2007). A disposal as a result of death will not trigger the withdrawal of any income tax relief obtained by the deceased. This is enacted by s.209(6) ITA 2007 and s.238 ITA 2007 for EIS shares and s.257FA(6) ITA 2007 and s.257GC ITA 2007 for SEIS shares. See VCM15010 and VCM36020.
The acquisition of the shares by the executors of the estate, from the deceased is not treated as a disposal by the deceased for CGT purposes because of s.62 TCGA 1992, which states:
“For the purposes of this Act the assets of which a deceased person was competent to dispose shall not be deemed to be disposed of by him on his death (whether or not they were the subject of a testamentary disposition).”
Where a gain on an asset is deferred using EIS deferral relief, it will come back into charge upon the happening of a chargeable event. Generally speaking, this is when the shares are disposed of, or if they cease to be EIS qualifying shares during the qualifying period of 3 years. Death is also not a chargeable event for the purpose of EIS deferral relief, which is confirmed by para 3(5) Sch 5B TCGA 1992, and so the gain on the buy to let property does not become chargeable as a result of the death. See VCM53140.
The executors take both the EIS and SEIS shares on with a CGT base cost equal to the market value at the date of death (s.62 TCGA 1992). The CGT exemption for EIS and SEIS shares does not apply to the executors, as it was not they who claimed the income tax relief on the shares, which is a requirement for the exemption (s.150A/150E TCGA 1992). Therefore, if they dispose of the shares at a gain, the estate will be liable to CGT. Executors can use the CGT annual exempt amount for disposals in the year of death, and disposals in the subsequent two tax years (s.1K(7) TCGA 1992).
So, in the scenario described, the deceased client potentially benefits from IHT relief on the shares, CGT deferral relief on the buy to let property, and income tax relief on the investment. The shares are then acquired by the executors of the estate but are just treated as “normal” shares in their hands for CGT purposes.
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