The painful impact of BPR changes on (S)EIS investors

Has the government materially weakened one of the four key benefits of SEIS/EIS for angels?!

To recap, the 4x main benefits of these schemes are often stated as:

1. 50% (for SEIS) or 30% (for EIS) up front tax relief.
2. Loss relief – up to another ~22% back if the startup fails.
3. Capital Gains Tax exemption on an exit, saving a 24% for higher rate tax payers.
4. Inheritance Tax (IHT) exemption, due to Business Property Relief (BPR) when shares are held for at least 2 years. IHT is currently set at 40% with rumours that the government may increase this, so IHT exemption is a great positive for investors looking to carefully manage any tax exposure for their estate on death.

Together, these benefits make SEIS genuinely the best tax scheme in the world: other countries offer schemes with similar intent (QSBS in America, ESIC in Australia, LSVCC in Canada, IR-PME in France, EII in Ireland and so on) but none of these are as generous as SEIS.

Of these reliefs, investors tend to focus on the first three, with IHT exemption being a nice to have. But changes announced in the Autumn Budget 2024 have softened the IHT benefits but also created a huge risk for angels, let me explain:

We have a theoretical investor, Bob, who has made 30x investments of £100k each under SEIS/EIS over a few years. If they die, these shares currently all pass to their estate under BPR and no IHT is due. Nice and clean.

The changes in the Autumn Budget 2024 - due to commence from April 26, introduced a £1m limit on the BPR IHT exemption (which has now been revised to a £2.5m limit): each of Bob’s investments would need to be valued when the investor dies and IHT would be due (subject to thresholds) on the aggregate current value of the shares, even though this is a theoretical valuation in an illiquid asset and represents a dry tax charge over an asset which could fail entirely. There is no mechanism to reclaim IHT if the company collapses post-death.

Or, for clarity: The estate will need to fund IHT before an investment exit occurs. The startup(s) may fail, reducing the value to zero, meaning that substantial IHT has been paid on a worthless asset.

Ouch!

The recently announced softening of the BPR limit from £1m to £2.5m is welcomed, of course, but the underlying issue remains: Bob is almost certainly leaving his loved ones a significant and unquantifiable tax liability on an inherently risky asset class.

For founders: this won’t affect you directly, but raising capital in the UK is already challenging - so anything that makes the asset class less appealing is obviously unwelcome news.

For the UK government: we urge you to protect the long-term integrity of SEIS/EIS by ensuring that IHT rules do not create a dry tax charge on illiquid, high-risk startup shares: reinstating full BPR relief for qualifying investments or introducing a mechanism to defer or reclaim IHT where value is unrealised or subsequently lost.