Treasury may use IHT relief to encourage investment

Gordon Brown is considering plans to scale back income tax reliefs on venture capital trusts and replace them with inheritance tax breaks as a means of ensuring long-term investment.

Link: Budget 05: IHT threshold raised

The Treasury is currently consulting on the tax reliefs, which run to the end of this tax year. One option is a reduction of the current 40% relief to 20% combined with IHT relief.

David Thorp, chairman of ISIS Equity Partners, who has been involved in the consultations, said: ‘There is a perception that the 40% tax relief is possibly too much.’

IHT relief is being considered in particular to encourage long-term investment in VCTs, which are commonly scheduled to run for between 10 and 15 years.

‘The Treasury is looking to see a permanent connection between high-net-worth investors and fast-growth companies,’ Thorp said. The current reliefs are thought to encourage a more fickle engagement, since investors can secure gains from the relief after the investment has run for only three years.

A system of IHT relief already exists for business assets and AIM companies, and would probably involve removing the investments from an individual’s estate after a specified period of time.

An encouragement to long-term investment would also discourage the emergence of VCTs regarded as abusive. These wind up as soon as possible and maintain capital purely to obtain the tax breaks.

Related reading