The recent autumn statement announcement included significant tax changes coming into force as soon as next April. Sarah Wakefield, Business Development Manager at Oxford Capital has put together the following useful summary to help advisers identify the changes and the opportunities for investors and how EIS may offer potential solutions.
The change:
The 45% tax rate from April 2023 will be applied to earnings over £125,140, a reduction down from £150,000, meaning more higher earners will be paying more income tax.
The opportunity:
Whilst many investors will probably begin by using pensions to reduce their income tax liability, the pension lifetime allowance freeze may result in many looking for alternatives to mitigate the liability. EIS offers investors the ability to reclaim 30% income tax relief for the tax year of investment and the ability to carry back the tax relief claim against the previous year’s income tax liability.
The change:
The proposed income tax personal allowance freeze until 2028 will push 3 million people into paying higher rates of income tax by 2026, according to analysis by the Institute for Fiscal Studies.
The opportunity:
Again, pension contributions may be the obvious option, but for those who have reached their lifetime allowance or annual allowance, EIS could offer an opportunity to reclaim some of the income tax liability whilst building capital over the longer term in a tax efficient way.
The change:
Dividend allowance will reduce from £2,000 to £1,000 from April 2023, and then down to £500 from April 2024.
The opportunity:
This change will significantly affect income shares not held in tax efficient wrappers, but also company directors who take dividends instead of salary from their companies. Companies sat on large amounts of cash may question whether to pull the cash out and pay tax now rather than wait. EIS, again, will allow 30% income tax relief. Whilst extracting the cash may attract 8.5%, 32.5% or 38.5%, the ability to reclaim 30% would reduce the effective rates directors would pay, whilst moving the funds into a more tax efficient (though less liquid) environment.
The change:
Capital Gain Tax personal allowance is to be reduced from the current £12,300 to £6,000 from April 2023 – with a further reduction to £3,000 from April 2024. Many investors may be asking the question ‘do I dispose and realize my gains now and pay now?’ or ‘do I want to hold the assets with gains long term (possibly until death)?’.
The opportunity:
Whether investors choose to realise now and potentially create a capital gain or whether they choose to leave it until later, EIS can offer valuable deferral relief on larger assets such as rental properties, second properties or businesses. This could result in a significant gain which could be managed out using EIS. Investors who hold investments outside tax efficient wrappers – such as pensions or ISA – should consider the longer-term effects that this may have on their investments. Adding EIS to a modern portfolio not only would offer further diversification, but EIS returns are free from capital gains tax (provided the investments are held for at least 3 years and income tax relief is claimed when investing).
The change:
IHT thresholds will be maintained at £325,000 for a further two years, which, considering the standard nil rate band for inheritance tax has remained the same since 2009, is probably no surprise.
The opportunity:
EIS investments qualify for business relief for IHT purposes after two years, provided the shares are also held on death.
In summary
It was anticipated that this latest autumn statement would result in tax changes, but where there is change there is opportunity. In the chancellor’s statement he reiterated that the UK have three of the best universities in the world, and that science and innovation are key to unlocking the UK’s growth, supporting our own ethos of backing founders of UK early-stage businesses.
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Sarah Wakefield, Business Development Manager, Oxford Capital
Sarah is responsible for building and maintaining relationships with financial advisers. She has worked in financial services for over 25 years, the last 15 years has been spent building trusted relationships with IFAs supporting them with tax planning solutions. She is progressing towards becoming a chartered member of the CII.
