Why now could be the best time to make tax-efficient investments
Why now could be the best time to make tax efficient investments

For an investor, tax efficiency is important. Maximising returns, minimising risk and reducing your tax bill is almost always a priority – but now more than ever, making the most of tax-efficient investments is crucial.

In October, the UK’s debt exceeded the size of the economy (£2 trillion), and some financial experts began to predict where the money to pay for the Government’s Coronavirus rescue – including furlough, which has now been extended until March 2021 – will come from. 

A review of capital gains tax (CGT) by the Office of Tax Simplification (OTS), which was commissioned by the Chancellor of the Exchequer, was released on November 11 2020, urging a major overhaul of the tax. 

The report found that the current structure of CGT ‘distorted behaviour’ and was often counterintuitive, with ‘odd incentives.’  

The current highest rate of CGT is 28%, but this could see a significant increase, as the review recommended a greater alignment between CGT and income tax. 

If this were to get the go-ahead, CGT rates could rise to as high as 45%, and investments that offer tax-free growth, among other tax incentives, would be more important than ever. 

 

Read more: 6 ways to invest tax efficiently

 

So, now could be the best time to make the most of tax-efficient investments including the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) – two of the most generous tax reliefs for investors into high-growth, early-stage businesses.

 

Enterprise Investment Scheme (EIS) 

The EIS was introduced in 1994 and offers tax reliefs that help investors into unlisted, early-stage companies offset the higher risks associated with investments of this kind.

As well as the opportunity to claim back up to 30% of the value of your investment and benefit from loss relief if the investee business fails, EIS-eligible investments enable investors to dispose of shares without paying CGT, and defer the payment of CGT where due.

 

Read more: A look back at four EIS opportunities

 

Disposal relief means you will not have to pay CGT on a gain on your disposal of EIS shares.

However, to be eligible to claim disposal relief, you must have:

  • Held the EIS shares for at least three years
  • Received EIS income tax relief in full on the whole of your subscriptions for the EIS shares, and none of the income tax relief must have been withdrawn

 

Deferral relief means when you dispose of an asset and make a gain, you are able to treat the gain as not arising until a future date. 

Unlike with disposal relief, you do not have to receive income tax relief in order to claim deferral relief, and you can defer any gain which arises on your disposal of an asset.

But, to obtain full deferral relief you must invest an amount at least equal to the chargeable gain.

For more information, read the Government guidance or speak to an independent financial advisor.  

 

Seed Enterprise Investment Scheme (SEIS) 

A younger sibling to the EIS, the SEIS was introduced in 2012 and focuses on younger and smaller – and therefore higher risk – businesses. 

Because of the higher associated risks, the tax reliefs offered by SEIS-eligible investments are also more generous than those of the EIS. 

For example, through the SEIS, you can claim back up to 50% of the value of your investment

As with the EIS, the SEIS also enables investors to dispose of shares without paying CGT, but as well as this, the SEIS offers reinvestment relief

Reinvestment relief means that an investor who has disposed of an asset that would give rise to a chargeable gain can treat a maximum of 50% of the gain as exempt from CGT if they have reinvested all or part of the amount of the gain into qualifying SEIS shares.

For more information, read the Government guidance or speak to an independent financial advisor. 

 

Taking advantage of CGT reliefs

The EIS and SEIS aren’t the only tax incentives that can help investors avoid a hefty CGT bill – for example, the ISA and its tax wrapper renders all returns free from CGT (as well as income tax). 

But for those looking to help drive the bounce-back of the UK’s economy post-COVID-19 – or just invest into a sector they’re passionate about – by supporting high-growth SMEs, the EIS and SEIS offer some of the most generous tax reliefs. 

And if the proposals to increase CGT rates – as well as reducing the annual CGT allowance – made by the OTS come into play, taking advantage of CGT reliefs will be key. 

 

Live EIS-eligible investment opportunity

Having facilitated over £45 million of investment into high-growth tech businesses and contributed to the creation of over 600 jobs in the past five years, Growth Capital Ventures (GCV) is pleased to announce the launch of their latest EIS-eligible investment round.

Investment from the current round will enable GCV to support 30 high-growth startups and create hundreds of new tech jobs within the North East through its Venture Builder unit, G-Labs. 

It will also allow GCV to increase internal headcount from 22 to 40 in the next 12 to 24 months. 

Now overfunded, having exceeded the initial target of £1 million, there is still time for new and existing investors to participate in this round before the deadline on Monday 30th November.

Read more: Live EIS-eligible investment opportunity

 

GCV Investment Opportunity

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