You can’t take it with you...

...and it’s increasingly tricky to leave it behind too. EN explores the options for entrepreneurs who want to limit the tax they pay during their lifetimes and beyond.

Saving ain’t what it used to be. With most offshore schemes a complete no-no from the Revenue’s perspective, family trusts being squeezed and employee benefi t trusts virtually battered out of existence, there are very few low-risk options for entrepreneurs who want either to minimise the income tax payable on savings over the ISA limit during their lifetimes or the inheritance tax attracted by their estates when they croak.

Pensions, if you’re even moderately minted, have also become rubbish. The lifetime limit on fund size (contributions plus capital growth and income, above which a punitive tax charge is applied) is to drop from £1.8 million to £1.5 million in April 2012.

To put that into context, a man retiring aged 65, whose wife is two years his junior and receives half his pension if she survives him, could expect a pension of around £70,000 per year, increasing at three per cent per annum, were he to buy an annuity with the full £1.5 million.

Drawdown (under which you pay your pension income directly from your fund rather than handing it over to an insurance company that keeps the capital and basically gives you back the interest) would pay out at a similar level.

But getting to that £1.5 million has become a lot harder. The maximum annual tax-relievable contribution cap was slashed last year from £225,000 to £50,000.

Because most entrepreneurs’ incomes are “bumpy”, and their really big paydays often come from the sale of all or a share of their company, this rule appears designed particularly to halt them in their pension saving tracks.

Property developers, who may only make any money once every two or three years, will be particularly hard-hit.

So, now that individuals are able to put less into their pensions, where else are individuals looking?

According to Katharine Arthur, tax partner at accountants MHA MacIntyre Hudson, “There has been a real rise in interest in the Enterprise Investment Scheme and venture capital trusts.”

These are inherently risky investments, but offer attractive tax benefi ts. The Enterprise Investment Scheme (EIS) provides income tax relief at 30 per cent on investments into qualifying businesses in which the investor holds less than 30 per cent of the shares. Gains are free from capital gains tax (CGT) and losses can be offset against the investor’s CGT or income tax bill.

And the scheme is actually about to get signifi cantly better in April. The annual amount that an individual can invest under the scheme will be doubled from £500,000 to £1 million and the size of company in which the investment can be made will increase from employing fewer than 50 full-time staff and holding gross assets of less than £7 million to employing under 250 staff and having gross assets of below £15 million.

According to Arthur, “One of the things that gets lost about EIS is that, as well as the income tax relief on the way in and the CGT relief on the way out, if you have a previous gain – which doesn’t have to be from an EIS investment – you can roll it into an EIS arrangement, enabling you to defer the payment of CGT on that gain.”

Venture capital trusts (VCTs), meanwhile, enable investors to take a holding in a basket of unquoted companies. They offer the same income tax (provided shares are held for at least five years) and CGT relief as EIS but are subject to an annual investment limit per individual of £200,000. Unlike EIS schemes, VCTs can also pay dividends (tax-free).

Martin Wilcocks, CEO of financial services fi rm Wilcocks & Associates, explains, “The VCT itself, which is a listed company, with its shares tradable via the stock exchange, is a tax-effi cien vehicle because it is exempt from corporation tax – saving up to 26 per cent in tax on turnover.”

A VCT has to invest in unquoted companies. However, for the purposes of HM Revenue and Customs’ definition, “unquoted” includes those companies whose shares are quoted only on the AIM or Plus stock markets.

One of the biggest issues facing many entrepreneurs, though, is what happens to their assets when they die. Bequests to spouses or civil partners are free from inheritance tax (IHT), and any unused “nil rate band” allowance of £325,000 can be transferred to the surviving spouse or civil partner upon the death of the first, effectively doubling the joint estate threshold to £650,000.

Over and above this level, though, IHT is payable by the estate at the standard rate of 40 per cent on the death of the second spouse.

EIS investments are exempt from inheritance tax if held for more than two years. Business property relief from IHT can also be claimed against the shares in and assets of one’s own company and any holdings in unquoted (again, for this purpose including AIMlisted) companies.

The only problem is that, although such holdings may be IHT exempt, you could also see far more than the 40 per cent IHT rate wiped off their value at a stroke. It’s because of this risk that the reliefs are so generous.

One less white-knuckle way to minimise IHT is to set up a family trust. While the reliefs available are no longer as generous as they once were, such trusts do still carry some advantages.

Currently an inheritance tax “exit charge” of up to six per cent of the value of assets transferred out the trust after the death of the settlor is payable. A tax charge is also levied on the assets of the trust at every ten-year anniversary of its setting up. This is fabulously complicated but is charged on the value of “relevant property” above the IHT threshold in the trust at a rate of 30 per cent of the prevailing rate for lifetime gifts (currently 20 per cent).

So, by our calculations, that’s six per cent every ten years – though assets such as business property will be exempt.

And trusts don’t just protect assets from the taxman. Arthur explains: “Trusts are also used to shelter assets from children’s spouses, if you’re not sure about them – even in cases where there is no indication that the marriage will end up in the divorce courts.”

Picture: Dead and buried: most of the best tax wheezes are long gone