Relief for tax-efficient investors including EIS and VCTs following today’s budget | Reaction

With the raft of measures introduced in today’s budget, tax-efficient investors have been expressing some relief to hear the Chancellor retain her commitment to schemes such as EIS and VCTs.

Chris Lewis, Chair of the VCT Association, commented following today’s budget: “Today’s Budget underscores the Government’s commitment to sustained economic growth. Venture Capital Trusts (VCTs) will continue to play a crucial role in delivering this through supporting high-growth businesses and providing essential funding to scale-up companies across the UK, and we welcome the Chancellor’s reiteration of the Government’s commitment to extend the scheme for another 10 years. With over 1,000 businesses currently benefiting from VCT funding, the sector significantly contributes to job creation and innovation.

Given the tax changes announced today, the benefits of VCTs for both investors and entrepreneurs are even more compelling. VCTs provide tax-efficient investment opportunities while offering patient capital that is reinvested to support the long-term growth of UK businesses. The scheme also continues to offer a tax-efficient way to invest in the AIM market despite the new 20% inheritance tax on AIM shares. Now is a pivotal moment for close collaboration between the VCT industry and the UK Government to seize the opportunity for growth.”

David Mott, founder partner of Oxford Capital, said: “Founders and startups will be pleased that the government continues to back the Enterprise Investment Scheme. EIS is a really important tool for stimulating the creation of new and innovative high-tech businesses. It’s right that Rachel Reeves gives firm backing to EIS, as it means we’ll see more of the knowledge and tech-based businesses Britain does so well.”

“Investors have already backed over 56,000 companies since 1994, when EIS began, taking high risks while supported by the tax reliefs and other advantages of EIS. Out of these companies, many unicorns have emerged and with continued stability, investors will be looking to back the next generation of startups to fuel Britain’s economic growth. Rachel Reeves’ support for EIS means the UK has every chance of remaining the leading startup and venture capital market in Europe.”

Commenting on the government’s ongoing commitment to VCTs, William Fraser-Allen, Managing Partner at Albion Capital, said:  “Albion welcomes the government’s recent commitment to strengthening the UK’s entrepreneurial ecosystem. By extending the Enterprise Investment Scheme and VCT (Venture Capital Trust) schemes to 2035, alongside pledging over £250 million to support small businesses, the government demonstrates a firm commitment to fostering a vibrant environment for entrepreneurship and growth within the UK’s private markets. This much-needed and awaited support will ensure the UK remains a global leader in the market, and we will continue to collaborate with the government to ensure this happens.

Fred Soneya, Co-founder and General Partner at Haatch, comments on tax rises for entrepreneurs in the Budget saying: “The Chancellor continues to back S/EIS for investors in fast-growing, exciting and ambitious UK businesses. While this is fantastic news for S/EIS investors, it’s still dampened by the reality that the entrepreneurial community is not particularly supported by the increases on Business Asset Disposal Relief (BADR) next year. These changes impact the ability of founders to build category-defining companies in the UK, with more than four in five small business owners stating that they plan to use this relief in the future.

“Equity incentive schemes are important for attracting and retaining talent – they allow founders to compete with the higher salaries on offer in the corporate world. We need changes that increase the UK’s competitiveness as a hub for innovation, not ones that risk stifling ambition, creating fewer jobs, and slowing investment in new products and services.”

Nicholas Hyett, Investment Manager at Wealth Club said:

“The threat of removing inheritance tax relief from AIM shares has dragged on the market for months. Today at least provides some certainty about what the future looks like, even if the IHT relief on offer has been cut in half. That certainty has driven a 3.9% spike in the AIM all-share index.

While the cut to tax relief will probably weigh on valuations long term, making it more expensive for small UK companies to raise funding, not abolishing it altogether has avoided the worst-case scenario of significant disruption as capital fled the market.”

Capital Gains Tax Reform

“The capital gains tax straight jacket has been pulled steadily tighter for years. Between 2022 and 2024 the tax-free allowance for CGT was cut from £12,300 to £3,000, and the decision to raise CGT rates across the board today will only make matters worse.

It’s a far cry from the growth focused, business friendly budget that was originally billed.

For investors facing higher CGT bills it may be worth considering investments in Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) qualifying companies. These government backed venture capital schemes, one of the few to avoid reform in today’s budget, allow you to defer or reduce capital gains taxes as well as offering income tax relief of 30-50% up front.

These schemes will become even more important going forwards, not just for investors but for small companies that may find AIM less welcoming in future.”

Business Relief Reform

“Business relief is crucial to the long-term future of many small family-owned businesses up and down the country. The good news is that the reforms in this budget are less draconian than feared, with full relief capped at a still fairly generous £1 million and IHT falling to 20% thereafter.

The decision not to add a hard cap to Business Relief avoids the worst-case scenario for those invested in specialist products that aim to qualify for business relief by investing in things like solar farms, property development lending and care homes. These are illiquid assets, and complete tax relief withdrawal risked investors being locked in for a long time and/or painful markdowns in value.

Nonetheless for larger businesses up and down the country, this reform will be a source of considerable concern.”

Richard Stone, Chief Executive of the Association of Investment Companies (AIC), said: “The Chancellor clearly had a challenge to balance the books in today’s Budget with commitments to higher spending and government investment. There is a recognition that the government and public purse cannot drive growth alone. We believe the private sector, including individual savers and investors, should be encouraged to play a part too. The government’s commitment to the ISA scheme and limits for the next five years is welcome, as is the extension of the venture capital trust (VCT) scheme through to at least 2035.

“It’s disappointing to see higher capital gains tax for investors from a government which has put so much emphasis on investment and growth. Increased tax on profits from shares is a disincentive to invest in the stock market outside an ISA or pension. Bringing all AIM shares and pension funds into the scope of inheritance tax will act as a disincentive to build and retain those long-term investments for the benefit of future generations.

“Everybody can make capital gains on their stocks and shares up to the annual allowance of £3,000 before being liable for any capital gains tax. Investors should make full use of tax-efficient ways to invest – the pension allowance and ISA allowance. Investors may also want to consider VCTs which invest in small and high-growth UK companies.”

Luke Barnett, Head of Tax Advantage Investments at St. James’s Place said: “Clearly AIM shares have reacted positively to today’s announcement regarding changes to business relief. Even though business relief on AIM shares has been halved in the Chancellor’s announcement, the fact that such a substantial level of potential business relief remains has helped to shore up confidence in the market. Should this initial reaction be maintained, it will certainly help to rejuvenate activity on AIM, providing smaller companies with access to funding, and ultimately helping to drive growth across the economy.”