What measures should you put in place to handle fiscal drag and the expected capital gains tax hikes in the incoming budget?
As the 2024 Autumn Budget draws closer, many investors are looking for tax-efficient options to soften the impact of expected tax increases.
Anybody who’s looking to sell a second home is bound to be thinking about capital gains tax, and what options are available to reduce their tax bill.
But investors should be thinking about their income tax bills too. Even though we’re unlikely to see increases to this tax, people may end up paying more thanks to fiscal drag.
Which taxes are expected to rise, and which aren’t?
Chancellor Rachel Reeves has said that some taxes will need to be increased to address a £22 billion shortfall in the public finances. While Labour has stated that its manifesto promise will be kept – that VAT, national insurance and income tax would not rise – the implication is that capital gains tax and inheritance tax are likely to see increases.
What about income tax, and what is fiscal drag?
While income tax is not expected to see increases, neither are changes expected to the freeze on tax brackets that have been in place since April 2021. The additional rate threshold was also lowered from £150,000 to £125,140 as of April 2023.
This means that as wages increase with inflation, a growing number of people will find themselves falling into higher tax brackets, a process known as fiscal drag.
According to the Office for Budget Responsibility, the freeze will see 3.2 million (9% more) new taxpayers, 2.1 million (47% more) new higher-rate taxpayers, and 0.35 million (47% more) additional-rate taxpayers by the 2027-28 tax year.
Capital gains tax relief available through EIS and SEIS investment
If you’re looking to sell a second home you’ll know that any gain realised from the sale will be subject to capital gains tax.
What you might not know is that the UK has a number of investment schemes that grant access to tax relief on capital gains tax specifically. The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) both offer very attractive relief options focused on capital gains tax.
These schemes incentivise investment into early-stage British startups – a high risk investment – with a suite of tax reliefs in each case.
In the case of EIS, the capital gains tax relief does not require the gain to have arisen that year, as long as the gain occurred no more than one year before you invest, or three years after you invest – so even if you’ve already paid tax on a gain, investing in EIS now means that you can apply the tax relief to it, and in most cases have the tax you paid returned to you.
In the case of SEIS, the gain must have arisen in the same year that you purchased your SEIS eligible shares.
EIS capital gains deferral relief
When you hold shares in EIS eligible companies you can defer a gain that has arisen, and only pay tax on it at a future time. For as long as you hold your shares, the gain will be deferred. If you sell your shares, the gain will come back into force, but you can defer it again by investing in EIS eligible businesses again. It is possible to defer the gain indefinitely, if you continue to invest in EIS.
The amount that can be deferred is determined by how much you invest, and for the entirety of the gain to be deferred, you must invest an amount equal to the gain.
Given that capital gains tax is expected to rise, deferring a gain from the present time to some future time when capital gains tax will be charged at a higher rate may seem counter-intuitive.
However, because you can continue to invest and defer, it’s still a useful option if you’re expecting a very large capital gains tax bill, and would prefer not to pay it in the current tax year.
EIS income tax relief
Investing in EIS businesses grants eligible investors 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 your shares were issued, or one year prior.
Many investors make an EIS investment each year just to gain access to income tax relief.
How can you access EIS capital gains tax relief?
If you’re interested in accessing capital gains tax deferral relief, take a look at the Access EIS Fund. We emphasise building large portfolios to spread risk widely and create optimal return potential. The companies we invest in are co-investments, made with some of the UK’s top-performing angel investors, allowing us to gain access to some of the UK’s most promising new businesses.
50% capital gains tax reinvestment relief through SEIS investment
When you hold shares in SEIS eligible companies, you gain access to capital gains reinvestment relief. This allows investors to cut their capital gains tax bill in half, as long as they invest an amount equal to the gain, and as long as the gain has arisen in the tax year that they acquire their SEIS shares.
SEIS income tax relief
Investing in SEIS businesses grants eligible investors 50% income tax relief on up to £200,000 invested. This relief can be applied to the year your shares were issued, or one year prior.
How can you access SEIS capital gains reinvestment relief?
If you’re interested in accessing capital gains tax reinvestment relief, take a look at our SEIS fund, the Founders Factory B2B SaaS Investment Programme. This fund will invest in pre-seed companies within the B2B SaaS sector, which will receive support from Founders Factory through 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.
A note on loss relief
While nobody likes to think of investments failing, with EIS and SEIS investing – and with startups generally – companies failing is to be expected.
For this reason, these investments offer an additional tax relief to investors that allows them to offset losses against their capital gains tax or income tax bill. For more about loss relief, take a look at our dedicated article.
SyndicateRoom's EIS and SEIS products
EIS
SyndicateRoom's Access EIS Fund co-invests with the UK's top performing angel investors to gain access to the most promising early-stage UK startup investment opportunities accross all sectors, on exactly the same terms.
The tax reliefs available through EIS include:
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.
To find out more about how it works, the companies we invest in, the angels we co-invest with, and how to get started, view our deal page and register by clicking the link below.
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Find out more about the Access EIS Fund.
SEIS
SyndicateRoom's new SEIS fund, in partnership with Founders Factory, will focus on investments in pre-seed, B2B SaaS businesses to capitalise on the new opportunities made possible through the implementation of AI technology in early stage businesses.
The tax reliefs available through SEIS include:
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.
You can find out more about this fund, the SEIS tax reliefs available to investors and make an investment using the link below.
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