Jonathan's situation
Jonathan is 73, divorced and retired, with two adult children. At 64, while working as a senior engineer and paying higher-rate income tax, he invested £80,000 in newly issued Venture Capital Trust (VCT) shares.
At the time, the investment qualified for 30% upfront VCT income tax relief, giving Jonathan relief of £24,000. Please note that the rate of VCT income tax relief fell to 20% for shares issued from 6 April 2026. Jonathan has been reinvesting his tax-free VCT dividends and, nine years later, the portfolio has grown to £100,000. For this illustration, selling the holding is assumed to leave £95,000 available for reinvestment after the costs associated with the sale.
Jonathan intends to leave his home and the remainder of his estate to his children and is increasingly conscious of the potential Inheritance Tax (IHT) liability on his estate. For this illustration, only his own full £325,000 nil-rate band (NRB) and £175,000 residence nil-rate band (RNRB) are assumed to be available.
Now fully retired, Jonathan has a much lower income tax liability than when he first invested in the VCT. The income tax relief and tax-free dividends that supported his original decision are therefore less central to his current objectives. He asks his adviser whether continuing to hold his mature VCT portfolio remains appropriate as his focus shifts towards the wealth he plans to leave to his children.
His estate is now worth approximately £1.35 million:
The adviser's recommendation
Jonathan’s adviser considers whether the VCT continues to meet his needs now that his income tax liability is lower and estate planning has become a greater priority. As part of this, the adviser considers Jonathan’s wider assets, need for accessible capital and ability to accept the additional risks associated with investing in unquoted companies.
Jonathan has held the VCT for nine years, beyond the five-year minimum holding period associated with his original income tax relief. The illustration therefore assumes he can sell the £95,000 holding without the original relief being withdrawn and without Capital Gains Tax on the £15,000 gain.
The adviser recommends reinvesting the proceeds in shares in unquoted trading companies expected to qualify for Business Relief (BR). Under current rules, the underlying business assets need to have been held for at least two years prior to death or transfer, and still qualify at the relevant time, for BR to apply. Jonathan’s previous VCT holding period does not carry across.
The previous VCT holding period does not carry across. The new investment must still qualify at death or transfer for Business Relief to apply.
A note on this scenario
This hypothetical scenario is designed to help advisers think through how this type of planning might apply in practice. Whether it would suit a client will depend on their full financial circumstances, objectives, needs, capacity for loss and attitude to risk, along with the features, risks, charges and tax treatment of any investment being considered. Any recommendation would need to be made by the client’s financial adviser following a full suitability assessment.
This scenario is for illustrative purposes only and does not constitute investment, pension, tax, financial or legal advice. Actual outcomes will depend on investment performance, charges, the client’s circumstances and the tax legislation in force at the relevant time.
What it could mean in numbers
An illustration of Jonathan’s inheritance tax position as he moves from a mature VCT portfolio to an investment expected to qualify for Business Relief.
A new investment means a new holding period
Jonathan’s nine years in the VCT do not count towards the new BR holding period.
During the new holding period, the £95,000 remains exposed to IHT. Business Relief is subject to the qualifying conditions being met.
Illustrative assumptions
- Jonathan’s estate remains worth £1.35 million, and the value of the £95,000 replacement investment is assumed to remain unchanged throughout, with no growth or fall in value. In practice, the value will fluctuate, and any change would alter both the value of Jonathan’s estate and the IHT figures shown.
- The VCT shares have been held for more than five years and can be sold for £95,000 without the original VCT income tax relief being withdrawn. In practice, the secondary market for VCT shares is relatively illiquid, so many VCTs operate a buyback policy, purchasing shares at a discount to the latest published net asset value. Buybacks are not guaranteed, and the proceeds available for reinvestment may be less than £95,000.
- Jonathan’s full £325,000 NRB and £175,000 RNRB are available.
- The £95,000 replacement investment is held for at least two years and qualifies for BR at Jonathan’s death.
- Jonathan has not used any of the £2.5 million combined allowance for property qualifying for 100% Agricultural Property Relief (APR) or Business Relief (BR).
- Fees, charges, debts, gifts, other exemptions and reliefs are excluded. In practice, the investment would be subject to fees and charges, which would reduce the amount invested and therefore the potential IHT savings shown.
Why the adviser recommends this approach
The recommendation reflects how Jonathan’s objectives have changed over time. The VCT supported his income tax planning while he was working, but with a lower income tax liability in retirement, those benefits are less central to what he now wants the £95,000 to achieve.
Reinvesting the proceeds in shares expected to qualify for BR gives Jonathan a way to retain ownership of the capital while seeking to reduce its exposure to IHT. The approach also recognises that the benefit is not immediate, as the replacement investment must have been held for at least two years at the time of death and continue to satisfy the BR conditions at the relevant time.
Subject to the investment completing its own holding period and qualifying for Business Relief at the relevant time.
Key risks and considerations
- Capital is at risk. The value of the investment may fall as well as rise, and Jonathan may receive back less than the amount invested. Investments in smaller, unquoted companies generally involve greater risk.
- Liquidity is not guaranteed. Shares in unquoted companies can be difficult to sell, so access to capital may be delayed and the amount realised may be lower than expected.
- Business Relief is not guaranteed. The investment must satisfy the qualifying conditions at the relevant transfer, and the tax treatment will depend on Jonathan’s individual circumstances and the legislation then in force, which may be subject to change, and such changes may be retrospective.
- The BR ownership period starts again. Jonathan’s VCT holding period does not carry across, so the £95,000 remains exposed to IHT until the replacement shares have satisfied the relevant ownership requirement and continue to qualify.
- The VCT benefits end on sale. Jonathan would no longer receive dividends from the VCT shares, and future returns would depend on the replacement investment.
Important Notice
For professional advisers only.
This article is for information purposes only and does not constitute investment, tax, financial or legal advice. It does not constitute an offer to buy or sell an investment or solicit any such invitation.
The information is believed to be accurate at the date of publication, but no representation or warranty, stated or implied, is made or given by any person as to its accuracy or completeness and no responsibility or liability is accepted for any such information or opinion. Tax treatment depends on individual circumstances, and tax rules may change.
Issued by Beringea LLP of Charter House, 55 Drury Lane, London, England WC2B 5SQ. Registered in England and Wales under number OC342919. Authorised and regulated by the Financial Conduct Authority under number 496358.
