There’s a 50% tax break Jeremy Hunt and Rishi Sunak haven’t axed

As Prime Minister Rishi Sunak and Finance Minister Jeremy Hunt chart a new course for the economy, little remains of their predecessors’ mini-budget a month ago.

But one announcement that escaped the axe is the expansion of investment programs that can pay off for investors. Three types of investments that give investors big tax breaks for supporting start-ups have been extended – and made more generous.

These are Venture Capital Trusts (VCTs), Enterprise Investment Schemes (EIS) and Seed Enterprise Investment Schemes (SEIS). They all exist to encourage investors to support new businesses and entrepreneurs.

In return for supporting fledgling companies, investors enjoy generous tax benefits, including reduced income, capital gains and estate taxes. But as economist Milton Friedman once noted, “There’s no such thing as a free lunch.” As attractive as the tax benefits are, the investments are risky.

When used properly, they can yield huge rewards. And it’s not just the ultra-rich who can benefit.

HOW THE ARRANGEMENTS WORK…AND SOME SUCCESS STORIES

Venture Capital Trusts, EIS and SEIS allow investors to invest their money in privately owned companies. The hope is that with enough investment behind them, these small businesses will grow rapidly and over time will either be bought by a rival or listed on the London Stock Exchange, yielding profits for investors.

Some of the programs’ biggest success stories include recipe box firm Gousto, which achieved up to 27 times returns for EIS investors. Flower delivery company Bloom & Wild delivered up to 18 times the original investment from investors, while DNA tech company Oxgene delivered up to 20 times.

But not all companies investing in VCTs, EIS and SEIS are so successful. As a result, investors have a chance of losing all their money. The level of risk and volatility is much higher than with more traditional investment portfolios.

VCT and EIS schemes look set to continue thanks to last month’s mini-Budget. Until then, there was a so-called sunset clause that could have seen these two vehicles close in 2025. The SEIS scheme was also extended. From April next year, individual investors can put up to £200,000 into a SEIS scheme each tax year – the current annual limit is £100,000.

Mike Hodges, tax partner at accountant Saffery Champness, says: “It is important that an investor is not blinded by the future tax benefits of EIS, SEIS and VCTs at the expense of the risk that investments in companies that qualify for one of these exemptions involve .’

He adds: ‘The fact that there are generous tax breaks should serve as a warning that there are significant investment risks. That said, for the ‘glass half-full’ investor, the prospect of an income tax prepayment and a capital gains tax-free exit can be attractive.”

SOME COMPANIES ARE MUCH MORE RISK THAN OTHERS

Venture Capital Trusts, EIS and SEIS schemes all invest in UK start-ups, but they operate differently. A VCT – the most popular – is a publicly traded company and behaves like a mutual fund. A fund manager builds a portfolio, typically about 30 to 70 companies, and investors buy shares in the VCT, rather than in the individual companies that make up it.

The fund manager can raise money to buy new investments or to supplement existing positions. They can only buy companies that are either unlisted or listed on the smaller Alternative Investment Market (AIM).

Last fiscal year a record £1.1bn was invested in VCTs – up from £685m the year before.

Annabel Brodie-Smith, Director of the Association of Investment Companies (AIC), says: “Our research shows that since 2018, VCTs have invested £1.7bn in 530 companies and these companies employ more than 14,000 people, with an average of 55 people per year. firm.’

EIS and SEIS schemes are much more risky. This is because you are investing in a particular startup company or a small portfolio of companies handpicked by a fund manager.

SEIS schemes can only invest in start-up companies – companies with less than two years of trading history and fewer than 25 employees.

EIS schemes are still only available to start-ups, but can include companies with up to seven years of trading history and fewer than 250 employees. The risky nature of EIS and SEIS means that investors must seek professional advice when buying – or prove they are either a high net worth individual or an advanced investor.

WHAT ARE THE TAX BENEFITS FOR INVESTORS?

There are many tax benefits available. Depending on the plan you choose, you may be able to claim a reduction in income tax on your investment, cancel a capital gains tax assessment and pay no estate tax on your investments.

VCTs: You can claim an upfront income tax reduction of up to 30 percent on the amount you invest in a new VCT (or new shares issued by an existing VCT). You must then hold the shares for at least five years. The maximum investment per tax year is € 200,000.

So if you invest £10,000 in a VCT, £3,000 can be deducted from your income tax assessment. If you sell your VCT shares and make a profit, the proceeds are not subject to capital gains tax. If your VCT pays dividends, they are also tax-free. Major managers of VCTs include Albion Capital, Foresight Group, Gresham House (Baronsmead) and Mercia Asset Management (Northern).

REQUIREMENT: You can invest up to £2 million per tax year in new shares in EIS qualified companies to take advantage of income tax relief at 30 per cent of the amount invested.

To maintain this tax benefit, you must hold the shares for at least three years from the date of investment or, if later, the date the EIS begins trading.

After three years, you can take advantage of capital gains tax on shares that are disposed of for a profit. You may also be able to offset any losses on the disposal of the shares against capital gains or in some cases against income, after deducting any tax credits.

You can also defer an existing capital gains tax if you reinvest profits in EIS-qualified stocks.

SEIS: You can invest up to £100,000 per tax year – £200,000 from April next year – and receive a 50 percent income tax credit. You also benefit from a capital gains tax exemption on any gains arising from the sale of shares after three years.

With both SEIS and EIS, there is no inheritance tax to pay on shares held for at least two years.

WHO CAN BENEFIT MOST FROM THE SCHEMES?

There are other simpler and less risky, tax-advantaged investments that investors should use before considering VCTs, EIS or SEIS schemes.

For example, anyone has the right to put up to £20,000 into an Isa stock each tax year and benefit from tax-free investing.

Tax relief on pension contributions also allows investors to increase the money they put into a pension fund.

But for those taking full advantage of Isas and pensions, the three schemes — VCTs in particular — are worth checking out.

After all, pension deductions are only available for the first £40,000 saved each tax year – or £4,000 for the highest earners.

Alex Davies, founder and CEO of Wealth Club – a company specializing in tax-advantaged investments – says: “Tax deductions for pensions have become less generous over the years. Also, as a result of recent tax changes, it is becoming increasingly difficult to achieve a good return on investment in owner-occupied homes. So investors are looking for alternatives.’

WHAT DOES IT COST TO INVEST IN ONE?

Using these schemes is not cheap. When buying a conventional mutual fund, the annual fees are usually around 1.5 percent. But the annual cost for VCTs is typically about two to three percent. There are also initial costs, which can be as high as 3.5 percent.

The costs for EIS and SEIS schemes are even higher. Managers argue that investing in startup companies requires a lot of research and subsequent management hands.

HOW DO YOU FIND THE BEST INVESTMENTS?

There is no substitute for good, thorough research. Read the regulations before committing money – and when in doubt seek independent financial advice. These investments aren’t easy to sell quickly – and sometimes you’re stuck – so don’t lock in money that you may need access to in years to come.

Bestinvest, part of asset manager Evelyn Partners, monitors new VCTs and new share issues of existing VCTs.

The best trusts currently available include:

Mobeus Income & Growth: These four VCTs invest primarily in unlisted growth companies, but have interests in more mature companies. Examples include MyTutor, a digital one-to-one tutoring platform; Andersen, a supplier of premium electric vehicle chargers, and Tapas Revolution restaurant chain.

The Albion VCTs: A joint bid of six VCTs who jointly invest in 70 companies. They invest in high-growth sectors such as fintech, software, technology and healthcare.

Investments include Quantexa, which helps bank, insurance and government customers detect financial crime – and pharmaceutical company Proveca, which specializes in pediatric drugs.

Pembroke VCT ‘B’ Shares: It focuses on five sectors: wellness, food and hospitality, education, design, media and digital services. Holdings include the photo book maker app Popsa; fashion label Bella Freud; and Chucs restaurants.

Jason Hollands of Evelyn says investors should remember that tax relief is only available for new equity issues and that, despite investing in growth companies, VCTs should be viewed primarily as revenue-generating tools.

He adds, “Since VCTs can pay tax-free dividends, most optimize this feature. So if they sell a holding for a profit, they will usually pay out the profit as a dividend to investors.”

Learn more about VCTs from the AIC at theaic.co.uk/vcts; The Wealth Club (wealthclub.co.uk); and www.bestinvest.co.uk/vcts/current-launches.