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The Enterprise Investment Scheme (EIS) has long been an attractive means for investors to generate tax-efficient returns. Yet recent changes in the 2023-24 tax year have, arguably, made it even more useful – particularly due to lower tax allowances for capital gains and dividends. In this article, we explain some of the key changes investors should know about since 6 April 2023 and how EIS could help your tax plan. We hope you enjoy this content. To find out more about our investment opportunities, visit our portfolio page here. To enquire regarding our latest projects and funding, you can reach us via:
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What has changed in the 2023-24 tax year?
In the 2022 Autumn Statement, Chancellor Jeremy Hunt announced a string of tax changes that would take effect in April 2023. The 2023 Spring Budget then built on these further, particularly by declaring an abolition of the lifetime allowance (LTA) for pensions. Much of the tax system is “frozen” or stays the same – e.g. the tax-free Personal Allowance for earnings is still £12,570 in 2023-24, shrinking by £1 for every £2 earned over £125,140.
There are at least three main changes for investors to know about in this new tax year. Firstly, the tax-free allowance for capital gains (i.e. the Annual Exempt Amount) has gone down from £12,300 per year to £6,000. For instance, if you sell a buy to let property for a £50,000 profit in 2023-24, then a higher rate taxpayer will pay 28% on £44,000. The £12,320 bill would be higher than if the property had been sold in 2022-23, when the bill would stand at £10,556.
Secondly, the tax-free allowance for dividends has also shrunk. In 2022-23 you could earn up to £2,000 from dividends (outside of an ISA) without paying tax. In this new tax year, this threshold has fallen to £1,000. Thirdly, the threshold for paying the additional rate of income tax (45%) has also gone down, from £150,000 per year to £125,140.
The UK already faced the highest tax burden in 70 years before these changes. With tax-free allowances now lower (and set to reduce further in 2024), high-net-worth (HNI) individuals are looking for ways to protect their hard-earned income and wealth. This is where venture capital (VC) schemes like EIS could play an important role.
How EIS can help investors in 2023-24
Investors still have a range of tax planning options in 2023-24. For instance, if you are married or in a civil partnership, then your partner is entitled to their own tax-free allowances. So, if you fully use your £6,000 Annual Exempt Amount in 2023-24 and your partner has not, you could transfer certain assets to them. UK residents are also each entitled to a £20,000 ISA allowance each tax year. Inside, your investments can generate interest, capital gains and dividends with no tax charge. Again, your spouse/civil partner is also entitled to this, so you could make certain transfers between you if one person fully uses their ISA allowance in 2023-24. A third idea is to use your pension. Inside, your investments are free from capital gains tax and dividend tax, not counting towards your tax-free allowances. Since 6 April 2023, the annual allowance has been raised by 50% to £60,000 per year for pensions. The tax-free “cap” on pensions savings (the lifetime allowance) is also gone, giving higher earners more potential to build and store wealth tax-efficiently. Just bear in mind that you cannot start accessing pension benefits until age 55%
EIS can be another key “pillar” in a tax-efficient investment strategy. First of all, investors can claim 30% income tax relief on EIS investments. For example, if you invest £100,000 into an EIS-qualifying company then, in effect, it only “costs” you £70,000. In 2023-24 a qualifying investor can commit up to £1m to EIS investments (or, up to £2m if at least £1m is invested in “knowledge-intensive” companies). Secondly, EIS shares are free from inheritance tax (IHT) if held for a minimum of 2 years – potentially making them a valuable tool in estate planning.
A third tax benefit of EIS to investors is that shares are exempt from capital gains tax (CGT) if they are held for a minimum of 3 years. Moreover, previous investments can claim tax relief if you use at least part of your gains to fund EIS investments (“Deferral Relief”). This aspect of EIS, in particular, could help many investors mitigate some of the tax changes which have materialised in the 2023-24 tax year. For instance, suppose you generate £50,000 in capital gains inside a general investment account in 2023-24. If you pay the higher rate of income tax, then the capital gains tax is likely to be £10,000 (20% on non-residential asset disposals). However, if you then invested all of the £50,000 into EIS-qualifying investments, then you may be eligible for Deferral Relief. However, speak with a financial adviser before making big decisions about investing in EIS or other VC investments. Make sure you understand and are comfortable with the level of risk involved, equipped with the full range of information you need.
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