My partner and I got engaged over Christmas and we’re excited to begin thinking about setting a date for the wedding. My wife-to-be is an entrepreneur and last year I invested in one of her small businesses through the Seed Enterprise Investment Scheme (SEIS), to help the business grow and for the tax advantages the scheme offers. I plan to make further such investments over the coming years. However, will being married to the owner affect my eligibility to invest via SEIS? Are there any alternative venture capital schemes I could use which offer tax relief?
Guy Wilmot, partner in the corporate and commercial team at law firm Russell-Cooke, says rules around SEIS are notoriously complicated, so it is right to think about this in advance. Unfortunately, it is likely that when you are married the previous relief will be disapplied and you will not be able to make further SEIS (or EIS) investments in your fiancée’s company.
SEIS relief is not available if an investor is “connected” to the company they invest in. An investor will be treated as being connected if they, together with their associates, hold more than 30 per cent of the company’s shares or voting rights.
An associate under these rules includes a spouse, parents and grandparents, children and grandchildren. As such, for the purposes of SEIS and EIS, a married couple are treated as a single unit. If that married unit holds more than 30 per cent of the company’s shares, the relief is not available. It is worth bearing in mind that extended family members, such as aunts, uncles and even brothers and sisters, may still be eligible to invest under EIS or SEIS.
Even if the shareholdings were below the threshold, it is still highly likely that the relief would not apply because employees of a company (and their associates) are also connected with that company.
The test of whether an investor is connected to a company applies for three years after the investment is made. If the test is breached within that period, then the previous relief may be withdrawn. As your investment was made last year, a delay in the marriage of potentially more than two years might be needed to avoid withdrawal of the relief, which perhaps takes tax planning to an extreme level, but is of course a personal choice.
As you plan your future with your fiancée, one option could be to consider becoming a part owner of the business. Gifts of shares between spouses do not attract CGT and there may be suitable strategies you could consider for supporting the growth of what will soon be a family business, including use of capital allowances.
Needless to say, couples considering merging business and financial interests on marriage will probably wish to take appropriate family law advice, potentially including putting in place a suitable pre- or postnuptial agreement.
It’s natural and common for entrepreneurs to turn to friends and family when getting their business ventures off the ground. But entering into a marriage does change the nature of the relationship, not only with the entrepreneur, but also with the business.
Should we put our house in trust for our daughters?
I am 75, living with my wife. We have two daughters, the younger one living and working in London. She is hoping to buy a flat and we are trying to downsize to help her fund the purchase. I am aware of the seven-year inheritance tax (IHT) rule.
However, to reduce IHT on the estate (of less than £1mn) we are also considering putting the house into trust for the two girls. If we did that, would that make the London daughter part-owner of the house and prevent her from gaining first-time buyer privileges?
Harry Cousens, an associate in the private client and tax team at Withersworldwide, says that with regard to your inheritance tax exposure, you should be aware that everyone has a “nil rate band” of £325,000 to set against the value of their estate. Also, where a residence or interest in it is inherited by children, an additional nil rate band (the “residence nil rate band”) of £175,000 is available, in certain circumstances, where the individual downsizes and assets of an equivalent value were left on death to direct descendants. This means that on your death, it may be possible for your daughters to inherit your estate IHT-free (on the basis that your estate is still worth £1mn or less).
Nevertheless, it is understandable that you may wish to make a lifetime gift to your daughter to help her on to the property ladder. For inheritance tax purposes, a gift to your daughter will be classed as a potentially exempt transfer (Pet).
Pets can become taxable at a maximum of 40 per cent if you die within seven years of the gift, with a tapering scale if you survive the gift by more than three years. You and your wife should consider which of you (or both) should make the Pet in light of this.
However, if you were to die within seven years of the gift, as outlined above, you should have your nil rate band of £325,000 to set against the value of the gift and the residence nil rate band may provide further relief. In addition, there is the ‘annual small gift exemption’ of £3,000.
If you sell your property, this will count as a disposal for capital gains tax, but provided the property is your only home that you have lived in throughout your period of ownership, principal private residence relief would apply and no capital gains tax would be payable.
Our next question
I’m trying to teach my eldest son the value of investing, but have realised my limitations. Thanks to Gordon Brown’s Labour government, he got an early savings boost from Child Trust Fund money, topped up with more from us over the years, which he switched into a high interest savings account when he turned 18. A year on, he is thinking about putting it into shares, but does not know where to start in terms of how to build a portfolio and the most tax- efficient way to do this. I’d like to help, but have realised that I know very little about starting out at this age. Can you help?
Turning to the question of a trust, whether settling your home will create a stamp duty issue for your daughters depends on the trust’s terms. If the girls have a right to occupy the property and/or receive any rental income, then this would jeopardise the availability of first-time buyers’ relief and it would also result in the additional property surcharge (now 5 per cent, following the Autumn Budget) applying to the purchase of a property by your daughters.
However, settling your property on trust is unlikely to be a good idea for other reasons. First, to the extent the property is valued higher than £650,000 (assuming both you and your wife have your full nil rate bands available), an immediate 20 per cent inheritance tax charge would apply to the creation of the trust. Second, if you continue to occupy the property you have given away, anti-avoidance provisions would apply, and the property would be treated as remaining in your estate for inheritance tax purposes.
Under current rules, with a joint estate worth less than £1mn, your daughters are unlikely to have any further inheritance tax to pay if you survive the Pet of the excess sale proceeds by seven years.
The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.
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