With taxes widely expected to rise in the October budget, investment schemes like EIS and SEIS that offer relief across a broad spectrum of taxes are set to become even more appealing to investors.
While it’s not yet known exactly which areas the increases will affect, there is a strong possibility that taxpayers will find themselves paying more, and that traditional investment vehicles, including pension schemes, will see their benefits diminish.
In July, UK Chancellor Rachel Reeves announced the likelihood of tax increases to address a £22bn hole in the public finances uncovered after the Tory government left power. Increases to income tax, National Insurance and VAT were ruled out during Labour’s election campaign, suggesting that capital gains tax or inheritance tax might be in line for an increase, and we might see changes to pensions and ISAs.
It is worth noting that while income tax is unlikely to increase, it is likely that Labour will retain the freeze on income tax thresholds that has been in place since the 2021/22 tax year. As wages increase against frozen thresholds, an increasing number of people will find themselves falling into higher tax brackets and paying more income tax as a result (a process known as fiscal drag).
Which are the expected changes?
Inheritance tax
It’s considered highly likely that we will see some kind of changes to inheritance tax. UK inheritance tax liabilities hit record highs in the 2021-22 tax year, rising 4% to £6bn primarily due to increased asset values and a long-standing freeze on the tax-free threshold.
Cutting allowances and removing exemptions – such as to agricultural land and family businesses – are more likely than a raise to the already high 40% tax rate, and it’s plausible that there will be some change to the 7 year rule, or a lowering of the threshold on estate value after which inheritance tax is payable.
Capital gains tax
While capital gains tax has already seen significant changes over the past few years, with the tax-free allowance falling from £12,300 to £6,000 in April 2023, and then again to £3,000 since April 2024, is it considered to be another tax likely to see changes.
These are expected to come in the form of a further reduction or removal of the tax-free amount, or a change to asset types currently exempt from capital gains tax (the asset types currently exempt are cars, motorbikes, boats, yachts, racehorses, greyhounds, clocks and shotguns.) A potential change on the more extreme end would be equalising CGT rates with income tax.
Pensions
While changes to pensions would be particularly unpopular, and might require complex processes to manage those people who have already committed to certain pension plans on the basis of current taxation, possible changes might include a reduction of the amount of tax-free cash available, currently at 25%, and the removal of the higher-rate of pension relief and introduction of a flat rate.
ISAs
There is a significant chance that the current tax free allowance available on Individual Savings Accounts (ISAs) will be reduced, with possible reform to combine cash and stocks and shares ISAs, including an increase in tax free allowances ring-fenced for investment in UK businesses.
What can investors do?
Tax-efficient investment schemes
Making an investment into an EIS or SEIS fund – both of which are considered high risk investments – allows eligible investors to claim relief on income tax, capital gains tax and inheritance tax. We’ll go through each of the reliefs available for each scheme below.
If you are considering making a tax-efficient investment like this, it would be wise to get started as soon as possible, before any changes are made to the tax reliefs in the October budget. Please note, tax rules can change and benefits depend on circumstances.
SEIS
Investment in SEIS – the Seed Enterprise Investment Scheme – are at the earliest stage of a company’s journey. To offset the risk and incentivise investment, the following reliefs are available.
50% income tax relief on up to £200,000 invested. This relief can be applied to the year shares were issued, or one year prior.
50% capital gains tax reinvestment relief which grants investors exemption from 50% of the tax due on any capital gain that arose in the year you made the investment when they invest an amount equal to the gain in SEIS shares.
100% capital gains tax disposal relief which exempts SEIS shares from capital gains tax liability providing they have been held for three years, and income tax relief has been claimed in full.
100% inheritance tax relief on SEIS shares provided they have been held for two years prior to death.
Loss relief on shares that fall in value which can be offset against income tax or capital gains tax.
EIS
Investment in EIS – the Enterprise Investment Scheme – are still early in a company’s journey, but further enough along that they are considered slightly less risky than SEIS investments (though they are still high risk). To offset the risk and incentivise investment, the following reliefs are available.
30% income tax relief on up to £1,000,000 invested. This rises to £2m if the first million is invested in knowledge intensive companies (KICs) This relief can be applied to the year shares were issued, or one year prior.
Capital gains tax deferral relief which lets investors defer a gain arising up to three years before and one year after the EIS investment, for as long as they hold their EIS shares.
100% capital gains tax disposal relief which exempts SEIS shares from capital gains tax liability providing they have been held for three years, and income tax relief has been claimed in full.
100% inheritance tax relief on SEIS shares provided they have been held for two years prior to death.
Loss relief on shares that fall in value which can be offset against income tax or capital gains tax.
SyndicateRoom offers the following SEIS and EIS products to investors
Founders Factory B2B SaaS Investment Programme SEIS FUND 1
This fund, powered by Founders Factory, presents an opportunity to invest in a portfolio of eight promising new pre-seed companies in the B2B SaaS sector. Founders Factory will support these companies with a programme designed to help them kickstart their growth at the earliest possible stage, as well as ready them for introduction to its contacts at top technology companies, VCs and corporates. Minimum investment: £10,000
The Access EIS Fund
We spent three years analysing the UK startup market and found that in its entirety, it grows by around 25% year on year.
We set about devising a method to capture this market growth for our investors by building them the most diverse portfolio currently available on the market. Minimum investment: £5,000
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