No changes for inheritance tax
You wouldn’t have been able to avoid the speculation around the Government’s plans for inheritance tax in the run up to this year’s Autumn Statement.
However, the Chancellor made no mention of inheritance tax. This shouldn’t be too much of a surprise, since prior to the speculation the Government never announced an intention to look at major changes in this area. Indeed, changes to inheritance tax felt like a poor fit for the direction of travel the Chancellor and Prime Minister have been consistently articulating.
Instead, the Chancellor focused on measures that can drive productivity in the form of enhanced investment allowances for businesses and making work pay through reducing National Insurance Contributions across the board by an expensive 2%.
These changes feel consistent with the messaging from Government over the last year and can be seen as a further indicator of how we might expect any more “headroom” created between now and the general election to be used.
Continued support for EIS and VCTs
The Autumn Statement also saw support extended for the Enterprise Investment Scheme and Venture Capital Trusts.
While support for the schemes had previously been announced by both parties, the extension of the schemes by a further 10 years underlines their success story for both businesses and investors.
It was pleasing to see the Chancellor shine a spotlight on the UK’s venture capital scene as the lifeblood of UK growth. And, of course, extra reassurance for financial advisers and investors in our EIS and VCT products.
VCTs are seeing strong demand again this year, with advisers focusing on targeting strong post-tax outcomes and tax planning being high on the agenda in this high tax environment.
Octopus Titan VCT has already raised around £40 million within a month of opening for investment, and the Octopus AIM VCTs have almost reached capacity with less than £5 million remaining. Octopus Apollo VCT opened for investment last week. (All as of 23 November 2023).
Estate planning and your existing clients
We manage the Octopus AIM Inheritance Tax Service and ISA, and the Octopus Inheritance Tax Service. These investments target qualification for Business Relief – a relief which enables portfolios to be left free from inheritance tax when an investor dies (if they’ve held their investment for at least two years).
The Government has been clear across various consultations that it is not looking to change Business Relief.
Most investors in these products have held their investments for more than two years. Their investment should therefore be free from inheritance tax when they die. This means that clients are likely to benefit from continuing to hold their investments. If they sold them today, any proceeds would be subject to inheritance tax when they die, effectively crystalising a tax liability equivalent to 40% of the current value of their investment. It would also trigger a capital gains tax liability on any growth in their portfolio, which would not arise if the investment is held until death. Another important factor to remember is that while these investments are designed to qualify for Business Relief, they’re also products that target growth for customers. This has not changed. These investments have performed to our expectations and we expect them to continue to do so:
The Octopus Inheritance Tax Service – has delivered on its target of a 3% return for almost every single one of its investors since its launch. Investors also benefit from our deferred Annual Management Charge or “Growth Shield” that builds up over time. This acts as a valuable cushion for investors against the impact of any future drop in value, although this doesn’t mean an investment is protected from losses (the Growth Shield is also lost when an investor sells their investment).
The Octopus AIM Inheritance Tax Service and ISA – we strongly believe that AIM-listed companies are significantly undervalued today presenting our investment team with opportunities to target attractive growth by backing businesses with strong underlying performance.
Making new recommendations
Inheritance tax receipts are forecast to continue to rise – soaring to £10 billion by the end of the decade1 – because of the continued freezing of the nil rate band, impacting more clients and a larger portion of their estates.
Helping clients with estate planning is an essential part of financial planning and has been under more focus in the wake of the Consumer Duty rules. Uncertainty is part and parcel of making tax plans, and we have robust plans in place to make sure we maintain the same level of support for our customers no matter the situation.
Inheritance tax in the future
Tax policy depends on the Government that is in power at any given time. As a general election will be held within the next 12 months, it’s important to consider the Labour Party’s position in relation to inheritance tax.
If the current Government were to take steps to reduce the inheritance tax burden in the time it has left before the upcoming general election, it would not be unprecedented for a Labour government to reverse them given an opportunity following the election. Labour has already stated that they would like to bring back a pension lifetime allowance following Jeremy Hunt’s scrapping of it in the March Budget.
The Labour party has given plenty of indications as to their stance on inheritance tax should they win the election next year. The party has previously stated it would not bring in a wealth tax (the most likely alternative to inheritance tax if it were to be abolished), and Rachel Reeves, Shadow Chancellor, was clear that reducing inheritance tax “was not the right priority” and that “right now [Labour] would not support it”.2
The Office for Budget Responsibility forecast released along with the Autumn Statement shows a sharp downgrade for economic growth in 2024 and 2025 from previous forecasts.3 While inflation is falling, the amount of headroom for making tax cuts may not be growing as fast as the Government hoped, leaving a more limited opportunity for voter giveaways.
Remember the risks
As with all investments, it’s important to remember the value of an investment, and any income from it, can fall as well as rise. Investors may not get back the full amount they invest. The shares of VCTs, smaller, unquoted and AIM-listed companies could fall or rise in value more than other shares listed on the main market of the London Stock Exchange. They may also be harder to sell. Tax treatment depends on individual circumstances and tax rules could change in the future. Tax relief depends on the VCT or portfolio companies maintaining their qualifying status. An Octopus AIM ISA is likely to be higher risk than more mainstream stocks and shares ISAs.
If you have any questions, please get in touch with your Business Development Manager.
Regarding VCTs this advertisement is not a prospectus. Investors should only subscribe for shares based on information in the prospectus and Key Information Document (KID), which can be obtained from octopusinvestments.com.
1Rachel Reeves refuses to say whether Labour would reverse inheritance tax cuts, The Telegraph, 19 November 2023
2 Chancellor refuses to cut inheritance tax – and take is forecast to soar to £10bn, This is MONEY, 23 November 2023
3 Economic and fiscal outlook, Office for Budget Responsibility, November 2023