Wealthy investors flock to first tax break amid capital gains tax crackdown
Wealthy investors are increasingly turning to start-up companies to reduce their tax burdens, especially as potential capital gains tax (CGT) approaches in the next budget.
Investments in seed enterprise investment schemes (SEISs) rose by 250% between July 4 and September 16 this year, according to the Wealth Club, and savers hope to reduce their CGT liabilities by up to 50%.
The level of SEIS investment is in line with the government’s efforts to stimulate economic growth by encouraging investment in British small businesses. SEISs allow investors to put up to £200,000 a year into start-up firms, offering significant tax benefits, including 50% income tax relief and an exemption from CGT on any gains made from the investment. Crucially, they also offer 50% relief from CGT on the sale of other assets, such as buy-to-let properties, when reinvested in eligible SEIS companies.
With the CGT reform expected in the budget, investors seize the opportunity to benefit from the extended SEIS tax break, which has recently been extended until 2035. A high-income taxpayer who reinvests £100,000 in a SEIS fund can reduce their CGT liability from £24,000 to £12,000, while also receiving £50,000 of income tax relief.
Nicholas Hyett of the Wealth Club points out that high net worth individuals are increasingly using SEISs to protect future tax benefits, given the potential for changes to CGT, inheritance tax, and pensions. “It’s no surprise that wealthy investors are taking advantage of programs that provide tax relief while protecting future gains,” Hyett said.
However, SEIS investments carry significant risk. Although the tax benefits are designed to compensate for the high risk of supporting start-ups, investors should be aware that almost half of SEIS companies fail within five years. Still, successful startups like Swytch Bike, snack company Olly’s, and nutritional supplement maker Hunter & Gather highlight the potential rewards.
In contrast, enterprise investment schemes (EISs) and venture capital trusts (VCTs) offer less tax relief, although they remain popular with wealthy investors. EISs allow up to £1 million in annual investment with 30% income tax relief and deferred CGT, while VCTs offer tax-free dividends and CGT relief, with fund-managed investments to help spread risk.
These plans are not for the risk-averse and should form only a small part of a broad, well-rounded investment portfolio, experts advise. Jason Hollands of Evelyn Partners warns that although the minimum holding periods for tax exemptions are set at three years, the exit of these private companies depends on finding a buyer, which is not guaranteed.
Despite the potential for high rewards, investors are also urged to consider the high rates associated with SEIS funds. Fees may include a 2.5% initial charge, as well as administration and performance fees that may be added over time. Investors must carefully assess the risks and rewards before entering into these high-risk schemes, where tax benefits alone should not drive decisions.
