Investors may need to start looking elsewhere for tax efficiencies from April, with exemptions for dividend and capital gains tax set to halve, and again in 2024.
While the government has said the Autumn Statement reduces the generosity of the tax-free allowances, it has also said it remains “supportive” of the enterprise investment scheme and venture capital trusts.
By reiterating support for the EIS, as well as for the seed EIS, the chancellor encourages private investment into early-stage ventures by offering a route for tax mitigation, says Ivan Teare, head of specialist tax portfolio services at Rathbones.
“With financial advisers’ guidance, tax-advantaged investing for patient investors can be an extremely effective use of capital,” he adds.
So as traditional investing becomes less appealing from a tax perspective, could it push more investors towards tax-efficient investments?
Mike Hodges, a partner at accountancy firm Saffery Champness, predicts that next year is likely to see more demand than usual for VCT, SEIS and EIS investments, as people plan for the capital gains tax exemption being halved.
“With the threshold halving again from April 2024, coupled with the fall in the dividend allowance to £1,000 in April next year and £500 a year later, it would be no surprise to see an increased appetite for tax-efficient investments.”
Alex Davies, CEO of Wealth Club, a non-advisory broker of tax-efficient investments, agrees that more people will turn to VCTs. He cites dividend and CGT rises, a reduction in the additional rate income tax band as well as freezes to pension allowances.
Tax-efficient investments are arguably less risky when taxes rise as reliefs become more valuable, says Davies, although, he adds, people should not rush into tax-efficient investing. “VCTs are for people who know what they’re doing and understand the risks.
“It’s for the money which you can afford to put aside to lose if necessary. This isn’t money you can access easily, and because they’re early stage businesses, you could lose the lot.”
Indeed, EIS and VCT investment opportunities are carefully targeted at investors where higher risk investments are appropriate, and who understand the opportunity and the risks, says Jess Franks, head of retail investment products at Octopus Investments. “These are long term investments, therefore it is not possible to dip in and out in order to simply access relief on investment.”
Tax relief for investors using venture capital schemes:
| EIS | SEIS | VCT | |
| INCOME TAX RELIEF | |||
| Maximum annual investment you can claim relief on | £1mn £2mn if at least £1mn of that is invested in knowledge-intensive companies | £100,000 | £200,000 |
| Percentage of investment on which you can claim | 30% | 50% | 30% |
| Tax relief on income from dividends | No | No | Yes |
| CGT RELIEF | |||
| Personal CGT relief available on your initial investment | Yes on 100% of investment | Yes on 50% of investment, capped at £50,000 | N/A |
| Type of CGT relief on initial investment | Deferral | Exempt from tax | N/A |
| Gains exempt from CGT when you sell shares | Yes if you received income tax relief | Yes if you received income tax relief | Yes |
| Relief available for capital losses against income | Yes | Yes | No |
| Source: GOV.UK | |||
Although pension contributions will still be the main way to reduce income tax liability, EIS and VCT will be extra options to consider when it comes to a tax-efficient investment strategy for the highest earners, especially if they are affected by the tapered annual allowance, says Jason Hollands, managing director, corporate affairs at Evelyn Partners.
Investors can claim up to 30 per cent income tax relief on EIS and VCT investments, but when it comes to financial planning, Hollands says the schemes have different uses.
“We see EIS as more relevant as part of an overall inheritance tax mitigation strategy, since EIS shares attract business relief after two years, and EIS can also be used to defer a capital gains tax liability.
