With the Autumn Budget on the horizon, we’re back with another interview in our series on GBI Magazine which focuses on the effects of a Labour government on tax-efficient investments. So far, we have spoken to YFM Equity Partners and Symvan Capital, and Green Angel Ventures, and SFC Capital, and Committed Capital.
This time, Ewan MacKinnon, Partner at Maven, discusses the changes he’s noticed so far, and his projections for the upcoming Autumn Budget.
1.) How has the result of the general election affected your company?
The general election has resulted in a period of stability in the UK. After a period when international buyers were shying away from investing in the UK, we have witnessed global buyers coming back into the UK market. We have seen this first hand, with two of our venture capital trust (VCT) portfolio companies bought by US-based firms in the couple of months following the election; Novatus, a partial exit to Silversmith which gave our VCTs a 4.7x return; and MirrorWeb, another partial exit to Mainsail which achieved a 4.0x return.
However, it is widely expected that the Autumn Budget will generate some significant tax policy shifts. Although changes relating to tax-efficient investing could potentially affect the options available to investors in areas such as pension planning or building share portfolios, the Labour government has made clear its commitment to supporting the country’s economic growth, and its belief in the valuable role of VCTs as part of its vision to make Britain the best location for starting and growing a business.
VCTs play a critical role in enabling economic growth, providing vital funding to start-up and scale-up businesses, with SMEs accounting for 99.9% of UK businesses. At the start of 2024, there were 5.5 million small companies in the UK, with SMEs responsible for three-fifths of private sector employment.
This positive role is reinforced by the EU’s recent approval of the UK government’s extension of the ‘sunset clause’ until 5 April 2035 to ensure that VCTs (and EISs, another important funding source for SMEs) will continue to provide generous investor tax reliefs. As manager of four VCTs, this means that we will be able to continue delivering funding support to earlier stage UK smaller businesses, helping to bolster the economy and strengthen key sectors to support the UK’s competitiveness, whilst providing attractive and tax efficient investment options for our investors.
2.) Do you think the Labour Government will make significant changes to tax policies on investments?
It is too early to say how the government will change tax policies relating to investments, though the extension of VCTs and EISs will help startups grow, attract vital private capital into the SME sector and strengthen the UK’s economy. SMEs are critical for driving investment, employment and economic growth, and VCTs have deployed £1.89 billion between 2021 and 2023 alone in private and AIM companies, reflecting their growing importance in providing vital growth capital to ambitious SMEs held back by the £22 billion funding gap. We therefore anticipate that these schemes will continue much as they are.
Possible changes to CGT, dividend and pension taxation may see investors turn to other tax efficient solutions, such as VCTs, to achieve a balanced, diversified investment portfolio whilst also mitigating tax liabilities. Inheritance tax (IHT) also remains a key area of speculation where, aside from Labour’s stated intention to end the use of offshore trusts to avoid tax, it is unclear if there will be further changes to IHT tax policies.
3.) In what way(s) have/will the Labour government’s pension policy impact tax-efficient retirement savings?
Pensions seem likely to be one of the most significant areas of change, with chancellor Rachel Reeves promising a “big bang of reforms”. It’s unclear for instance whether the government may increase taxes on pensions by reducing the current £268,275 maximum limit on pension tax-free cash or restricting pension tax reliefs and rates.
Additionally, as money held in pensions is treated differently to other assets for IHT purposes – falling outside of a person’s estate on death – it can currently be passed onto beneficiaries exempt from IHT. Should this change, the tax efficiency of pensions as retirement savings vehicle will be reduced, perhaps incentivising investors to put their money into other tax-efficient schemes.
Even with last year’s pensions allowance changes, the annual allowance for pensions contributions remained low enough that VCTs continued to offer a highly attractive alternative for investors who have fully funded other options such as ISAs and pensions, helping to supplement tax-efficient portfolios. Should the rumoured pension reforms go ahead, this should help to reinforce the attractions of VCTs as part of a balanced, diversified investment portfolio.
4.) How will the Labour government’s approach to wealth taxes influence high-net-worth individuals’ investment decisions?
High-net-worth individuals (HNWIs) are an important portion of the UK’s investor ecosystem, whose investments in British businesses help drive innovation and economic growth, and who are themselves often entrepreneurs. It is important that tax policy changes do not alienate them and stifle investment.
Potential changes to CGT and IHT may cause HNWIs to favour tax-efficient vehicles such as VCTs and EISs and incentivise investment in British startups and scale-ups. However, increased taxes may see HNWIs move their assets to lower-tax jurisdictions or relocate entirely to avoid higher taxes altogether, reducing tax revenues as well as investment in British businesses, which is something we would expect the Government to wish to avoid.
Clarity and stability are essential for reducing investor and business uncertainty, potentially causing HNWIs to delay or reduce their investments, and harming businesses across the country. To make the UK an attractive hub for startups and scaleups, the Government must carefully consider the broader economic impact of tax policies, so as not to disincentivise investment nationally and reduce tax revenues.
Ewan is Partner at Maven Capital Partners, based in its Glasgow and Edinburgh offices. He is responsible for new Private Equity investments across Scotland and North East England and is a member of the Maven Investment Committee. Ewan has 25 years’ experience managing, advising and investing in SMEs. He joined Maven in 2009, having previously worked in Johnston Carmichael’s corporate finance team, and was managing director of MacKinnons of Dyce Limited, a specialist retail business which was sold to a FTSE 250 listed company in 2006. He has a first-class honours degree from the Aberdeen Business School and is a Fellow of the Association of Chartered Certified Accountants.
