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Bure Valley Group is an investment introducer platform which links successful investors with exciting, innovative UK startups seeking funding. This content is for information purposes only and should not be taken as financial or investment advice. 

Chancellor Hunt’s Autumn Statement (Nov 2022) announced a set of tax changes which are likely to soon have a big impact on investors. Amongst the coming changes include a lowering of the Annual Exempt Amount from April 2023 (the amount that investors can earn in capital gains each year without tax) and a looming reduction in the tax-free dividend allowance. In this article, our investment team at Bure Valley Group explains why the Enterprise Investment Scheme (EIS) could now prove even more vital for helping investors mitigate needless taxes. 

We hope this content is useful. To find out more about our EIS and other investment opportunities in our exclusive investor network, visit our portfolio page here. To enquire about our latest projects and funding (for investors and founders, respectively), you can reach us via:

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What are the Chancellor’s tax changes?

The 2022 Autumn Statement did not bring any notable tax “rises”. However, it is likely to bring additional tax revenues to the government by reducing many thresholds. A notable one is the lowering of the threshold for the additional rate of income tax, which means that taxpayers will need to pay the 45% rate on earnings over £125,140, not £150,000. 

Moreover, the current Annual Exempt Amount for capital gains (£12,300 in 2022-23) will be lowered to £6,000 per year in April 2022. This tax-free threshold will then go down further to £3,000 in 2024. Note that this change does not affet investments held inside an ISA. Investors can still commit up to £20,000 into their ISA(s) each tax year and generate dividends, interest and capital gains without tax. However, many investors hold capital which exceeds this £20,000 limit and many of their assets might not be compatible with an ISA (e.g. crypto and buy to let investments). To avoid a needless tax bill, therefore, investors will need to think creatively.


How EIS can help investors with capital gains tax

One little-known benefit of the Enterprise Investment Scheme is “capital gains deferral”. This could help some investors with their capital gains tax bill in the coming tax years. Here, you can dispose of an asset (e.g. non-EIS shares in a general investment account) and put the profits straight into EIS-qualifying investments. Provided the EIS shares are then held for at least three tax years, the investor could potentially sell the shares later, at greater tax efficiency.

An example may help to illustrate how this works. Suppose an additional rate taxpayer sells an asset (e.g. a buy to let) and generates a £100,000 capital gain – putting £91,700 outside of his Annual Exempt Amount (in 2022-23). At this point, the £91,700 profit may be subject to 28% capital gains tax, leading to a bill of £25,676. However, imagine the investor took this profit and invested it into EIS-qualifying companies. Three years later, the £100,000 investment doubles to £200,000 – at which point, the investor sells his EIS shares. Here, the investor would still need to pay the £25,676 capital gains tax bill, but he would have £100,000 in EIS returns to pay for it (leading to a net return of £80,000).


Risks to consider with EIS

EIS is not for everyone, however. EIS-qualifying companies are in the earlier stages of their business lifecycle, where they are often still establishing profitability and are more at risk of failure. There is a chance, therefore, that an investor could commit capital gains to an EIS opportunity to try and save tax, only to lose it if their investment collapses. 

Here, the nature of EIS itself can provide some protection via “loss relief”. This allows investors to offset an EIS loss against their income tax bill (at their highest marginal rate). For someone paying the additional rate, therefore, this could allow up to 45% of at-risk capital from a failed EIS investment to be reclaimed. However, this mechanism still does not offer full protection of investor capital.

This is why investors need to carefully consider their risk tolerance, investment goals and time horizon when integrating EIS investments into their portfolios. An investor may wish to include a greater or lesser share of these opportunities depending on how much risk they are comfortable with, for instance. Moreover, diversification is also crucial to help spread out investment risk. A fund of EIS opportunities can offer some built-in diversification, but many investors will prefer to choose their own set of hand-picked EIS companies for their portfolio. Here, it can help to be a part of an EIS investor network. This provides opportunities for investors to rub shoulders with each other and access a range of pre-vetted EIS projects. A network can also facilitate efforts to diversify EIS investments as investors combine capital to invest in multiple projects.



Interested in finding out more about the exciting startup projects we have on offer to investors here at Bure Valley Group? Get in touch today to start a conversation with our team and discuss some of the great investment memorandums we have available here:

+44 160 334 0827

 [email protected]