For many years, HMRC has offered some of the most generous incentives to support private investment in the UK. The Seed Enterprise Investment Scheme (SEIS), Enterprise Investment Scheme (EIS), and Venture Capital Trusts (VCTs) are among the most commonly used amongst investors. Designed to encourage private wealth to back early-stage businesses, these investors understand that while such investments can carry significant risk, they also offer the potential for substantial returns.
Early-stage businesses often struggle to raise equity finance, making SEIS and EIS a trusted and crucial source of funding. These schemes play a vital role in facilitating the smooth flow of capital from private investors to high-growth startups, helping to fuel innovation and job creation.
SEIS, EIS, and VCTs share several key features, including generous tax reliefs to mitigate investment risks. These typically include income tax relief. Specifically, EIS and VCTs offer 30% income tax relief, while SEIS offers an even more generous 50%.
However, as the tax year draws to a close and investors assess their income tax liability, it’s important to consider “carry back”—a key benefit available under SEIS and EIS but not VCTs. Carry back allows investors to apply tax relief from investments made in the current tax year as though they were made in the previous tax year, effectively reducing their prior year’s tax bill. In contrast, VCT income tax relief is only available for the tax year in which the investment is made.
Now is the time to act if you have an income tax liability to mitigate for the tax year ending April 2024. Many EIS funds are deploying capital this month, allowing investors to take advantage of carry back. Some funds, such as the Symvan Technology EIS Fund, also provide access to a diversified portfolio of up to 12 companies, further reducing investment risk. Acting now can help investors make the most of available tax reliefs while supporting the next generation of UK businesses.
In what way(s) has the change to the CGT impacted tax efficient investments?
October’s Autumn Budget brought about the now well-known increased tax rates for disposals to better align CGT rates with income tax. In short, these CGT increases make tax-efficient investment schemes even more attractive.
Any CGT liability can be deferred by reinvesting gains into EIS-qualifying companies. The deferred tax becomes payable only upon the disposal of those EIS shares. For many this offers long-term planning benefits.
The above is in addition to the benefit of income tax relief reducing one’s overall tax liability. For EIS this is 30% relief on investments up to £1m each year (or £2m if investing in knowledge-intensive companies).
Furthermore, gains from EIS investments held for at least three years are exempt from CGT, offering substantial tax savings.
These changes now provide added strategic reasons for financial advisers to consider EIS in the entire tax planning process, with individual financial goals and risk tolerance in mind.
How can investors balance risk and return while maintaining an investment approach which is tax-efficient?
Balancing risk and return as an EIS investor requires a strategic approach to portfolio construction. While EIS investments offer generous tax incentives and high-return potential, they also come with inherent risks due to the early-stage nature of the businesses involved. Investors can mitigate these risks through careful diversification and structured allocation.
First, EIS investments should form only a relatively small portion of a broader investment portfolio, with exposure to lower-risk assets, all based on suitability and risk appetite.
Second, spreading risk across multiple EIS fund managers with different investment strategies can help balance returns. Different managers focus on various sectors and investment stages, so selecting multiple managers reduces reliance on any single strategy while increasing exposure to diverse opportunities.
Third, diversification should extend to the underlying portfolio itself. Investing in EIS funds that hold a broad mix of companies across industries, business models, and growth stages further mitigates risk. Notwithstanding the benefit of loss relief, a well-diversified portfolio reduces the impact of any single company underperforming or failing.
Finally, investing across multiple tax years helps navigate economic cycles and smooth out market volatility. Rather than making a one-time large investment, spreading contributions over several years allows investors to capture opportunities in different economic conditions, reducing timing risks and increasing the chances of backing successful businesses. The impact of Covid-19 for some portfolios was a blip in performance when compared to other years.
Are there any expected tax changes that investors should be preparing for in the coming financial year?
Starting from 6 April 2027, most unused pension funds and death benefits payable from pensions will be incorporated into an individual’s estate for IHT purposes. This means that the value of your pensions at the time of death will count towards the £325,000 IHT threshold. If your estate exceeds this threshold, the portion above it will be subject to IHT at a rate of 40%.
Here’s where EIS can further benefit future tax planning. EIS investments can qualify for 100% Business Property Relief (BPR) from IHT if the shares are held for at least two years.
This is crucial for estate planning, as it allows you to pass on your EIS investments to heirs without them being subject to IHT (up to a 40% tax rate on estates worth above £325,000).
The combination of EIS and IHT relief offers a powerful strategy for wealth management, especially for those impacted by pension rule changes. As pensions may become less attractive for saving, EIS and IHT reliefs can provide an alternative way to invest for the future and reduce the tax burden, all while contributing to succession planning.
Nicholas Nicolaides – Investment Director & Co-Founder, Symvan Capital
