15 Mar 65% of wealthy investors expect to increase exposure to venture capital schemes as a result of upcoming tax rules
Over two-thirds of wealthy investors intend to invest more into tax efficient investments, such as Venture Capital Trusts (VCTs), the Enterprise Investment Scheme (EIS) and its younger sibling the Seed Enterprise Investment Scheme (SEIS), as a result of the onerous new tax increases coming in from next month. This is according to a survey of 1,300 high-net-worth investors who are members of Wealth Club.
New tax rules applicable from 6th April 2023 mean that higher earners will be hit by a series of punitive tax changes including:
The lowering of the additional rate tax threshold from £150,000 to £125,140.
The Capital Gains Tax allowance dropping from £12,300 to £6,000 (and to £3,000 in 2024).
The reduction of Dividend tax free allowance from £2,000 to £1,000 (and then £500 from 2024).
Just 5% expect to invest less, supporting the notion that, for most investors, it’s tax incentives that remain the main driver behind the ongoing success of the three venture capital schemes in the UK – VCTs, EIS and SEIS.
Of those who responded to the survey 56.4% said they would be investing in VCTs, 26.78% in EIS and 14% in SEIS.
Alex Davies, CEO of Wealth Club, the UKs largest broker of VCTs, EIS and SEIS said:
“The results of our survey show that the next few years are likely to be bumper years for EIS, SEIS and VCTs in particular, as investors look to shield some of their hard-earned money from what is arguably the harshest tax environment since the 1970s.
Whilst April’s punishing tax rises are bad news for investors’ pockets, there is at least a silver lining for UK PLC. Currently around £2.5 billion is being pumped into VCTs, EIS and SEIS annually. If two thirds of investors increase their contributions as a result of more restrictive tax changes that will – by accident rather than design – deliver a massive cash injection to British start-ups, which is great news for jobs and economic growth.
Venture capital schemes such as VCTs, EIS and SEIS are an extremely tax efficient way for more experienced investors to invest for their future. When you invest you get income tax relief of between 30% (VCTs and EIS) and 50% (SEIS). Returns are also tax free.
But it’s not just about the tax relief. Through these schemes investors can access young, fast growing, entrepreneurial companies which have the potential to offer high returns as well as acting as a diversifier to a mainstream portfolio of funds and shares.”
How the three schemes work:
Venture Capital Trusts (VCTs) offer up to 30% income tax relief. Returns are paid through regular tax-free dividends, which is a nice bonus. The allowance is a very respectable £200,000 a year.
Enterprise Investment Scheme (EIS) investments also offer up to 30% income tax relief. There are no tax-free dividends, but one bonus here is that you can also defer chargeable capital gains you’ve realised. For as long as you stay invested in any EIS, you can forget about the CGT bill. It will only become payable once you come out of the EIS, unless you re-invest the money into another. The allowance is a whopping £1 million a year or £2 million if you invest at least £1 million into “knowledge intensive” companies.
The Seed Enterprise Investment Scheme (SEIS) is the real winner when it comes to tax savings. When you invest you can cut both your income and capital gains tax in half. The allowance is a more modest but still generous £100,000. But that probably doesn’t matter too much when you consider a £100,000 investment could save you up to £50,000 income tax plus £14,000 capital gains tax. The allowance is set to double in the new tax year.
