As the 2024/25 tax year draws to a close, Mark O’Donnell of MICAP (part of Defaqto) reminds us why it’s important to examine the shifting dynamics of the tax-advantaged investment landscape.
Recent budget announcements and market trends have introduced significant changes, impacting how investors and advisors approach these strategies.
One of the most notable developments stemming from the 2024 budget is the reform of Business Relief (BR) and Agricultural Property Relief (APR). BR and APR are both established tax reliefs that can reduce the Inheritance Tax (IHT) that is paid on death. From April 2026, the availability of 100% BR will be capped at £1 million.
Amounts exceeding this threshold will be subject to a 20% IHT charge. Alongside this, relief on shares in AIM-listed companies will be halved from 40% to 20%, also effective from April 2026. While we await the full legislative details, these developments signal a change in the landscape of IHT planning.
Despite these changes to BR, the government has reaffirmed its commitment to other tax-advantaged schemes. The extension of the sunset clause for both Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCTs) for another 10 years to 05 April 2035 provides welcome stability.
This extension ensures that qualifying investors can continue to benefit from up to 30% income tax relief on investments in these schemes, while Seed Enterprise Investment Schemes (SEIS), which have no sunset clause, remain a valuable option for early-stage investments with up to 50% income tax relief.
The interplay between pensions and IHT is also becoming increasingly relevant. While not directly within the realm of tax-advantaged investments, the impending inclusion of pensions within an estate for IHT purposes is likely to influence financial planning. This development may prompt investors and their advisors to explore alternative tax-efficient investment strategies beyond traditional pension planning, for clients who are both in their accumulation and decumulation phases.
In addition to the 30% income tax relief on investments up to £200,000 annually for VCTs, coupled with CGT free performance and tax-free dividends, VCTs remain an attractive option for many investors. VCTs typically aim for a 5% plus dividend yield and may distribute special dividends from successful portfolio company exits; however, it’s crucial to acknowledge the inherent risks associated with investing in a portfolio of growth companies. Performance can vary, and careful due diligence remains essential. Typically, most VCTs conduct annual, or alternate year fundraises.
Looking at current fundraising for VCTs, there are some VCTs that have already reached their fundraising targets and closed to new investors. This highlights the importance of staying informed about launch dates and fundraising rates. MICAP data reveals that £388 million has been raised this tax year to 12 January 2025, compared to £306 million to the same date last year. Of this, £220 million has gone into the now closed British Smaller Companies VCTs, the two Mobeus VCTs and the Foresight VCT and Foresight Enterprise VCT.
However, the absence of Octopus Titan VCT from the market this year, due to an ongoing strategic review, is also a notable development, particularly given its fundraising target of £200 million last year, with the Amatil AIM VCT also undergoing a review and change of investment manager and alteration to its investment strategy. The VCT landscape is also witnessing a degree of change
Some investment managers that manage multiple VCTs are merging offers, with Mobeus, Albion, and Foresight all merging some of their VCTs to benefit from efficiencies of scale. In addition, a few VCTs have launched over the last few years with Praetura, Guinness and Fuel Ventures all recent entrants to the VCT market, and Puma who manage several VCTs have recently launched a new AIM VCT.
A MICAP survey conducted post-budget indicates that advisors intend to maintain or even increase allocations to both EIS and VCTs, suggesting continued investor appetite for these schemes, which have both recently celebrated their 30th anniversaries. Over this period several well-known companies benefited from early-stage investment from EIS and VCT offers, enabling them to grow to where they are now. Companies like Deliveroo, Revolut, Graze, BrewDog and Zoopla as well as many other successful companies that are significant in their sector.
EIS investments, also benefit from 30% income tax relief while offering valuable benefits such as BR, CGT deferral, and loss relief. However, they typically involve longer holding periods than VCTs, with portfolios generally remaining at least partially invested for more than five years before full exit and investors are typically allocated into a smaller number of companies than within a VCT. Investors can claim reliefs on up to £1 million invested annually, or £2 million for knowledge-intensive qualifying companies, which is higher than the £200,000 annual allowance for VCTs.
The increasing availability of HMRC-approved knowledge-intensive EIS offers provides clarity on investment dates for income tax relief purposes, although the underlying investment dates remain relevant for CGT deferral and BR. Investors in an approved knowledge-intensive EIS fund also receive a single EIS5 form, in comparison to a separate EIS3 for each investment within a standard EIS offer.
The adoption of the FCA’s Sustainability Disclosure and Labelling Regime (SDR) by some EIS offers, such as the Green Angel Ventures’ EIS Climate Change Fund and OnePlanetCapital Climate Change EIS Fund, reflects a growing focus on sustainable investing within this space. EIS managers are also reporting increased interest from potential investors this year along with an improved environment for potential exits over the next 12 months compared to this time last year.
Looking ahead to the BR changes in 2026, the reduction in relief for AIM-listed companies is expected to impact investment flows. MICAP survey data suggests advisors anticipate reducing allocations to AIM BR offers over time. While managers of both AIM and unlisted BR services are addressing investor queries regarding potential transfers between their offers, there is no indication of a widespread exodus from AIM BR. Conversely, unlisted BR offers are experiencing increased inflows, driven by the clarity provided by the £1 million cap and the implications of pensions falling within estates for IHT.
As the tax-advantaged investment landscape continues to evolve, staying informed and adapting to these changes is paramount. Careful planning and due diligence is essential for investors and advisors seeking to navigate this complex yet potentially rewarding area of investment.
Advisors in this space need to be able to demonstrate that they have researched the market and are able to clearly explain why they have selected one offer over the rest, or why they have selected several offers to provide a diversified portfolio for their clients. Such research needs to demonstrate research across performance, liquidity, fees and charges, the investment adviser managing the offer, and the investment team. It also needs to show that the stage of company and investment strategy match those of the investor. It is a sector with moving goal posts in terms of offers opening and closing and legislative changes but has the potential for great rewards for its investors too.
This interview featured in the latest issue of GBI Magazine, which you can find here.
About Mark O’Donnell, MICAP Head of Research
Mark is the Head of Research for MICAP, responsible for managing MICAP’s team of analysts and providing oversight on MICAP Reviews, MICAP Data, MICAP Impact Scores and MICAP Panel Support Services.
Mark was previously a researcher for Orthogonal Partners, where he was responsible for researching new investment opportunities across a broad range of esoteric investments opportunities, as well as monitoring current investments. During this time, he completed the Investment Management Certificate.
Prior to that Mark was a researcher for one of the largest UK family offices, supporting the chairman across a range of family interests. Mark holds a MSc in Corporate and International Finance from Durham University and a BSc in Rural and Environmental Economics from Newcastle University.
