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As we near the 30th October deadline for the Autumn Statement, many media pundits are speculating about the potential form of the Chancellor’s “painful” tax and spending changes. Much of the attention has fallen on key fiscal policy areas such as capital gains tax, inheritance tax and pensions. However, less has been said about venture capital.
Could tax-efficient investment schemes, such as EIS and SEIS, help to “shield” early-stage investors from a potential tax raid in 2024? Below, we explore this question more deeply. To learn more about our EIS projects and other early-stage opportunities, visit our portfolio page. For enquiries regarding our latest projects and funding, you can reach us via:
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What are the pundits saying?
Many political analysts are predicting tax rises in the Autumn Statement. The Labour government quickly announced a £22bn “black hole” in the public finances shortly after taking power in July 2024. This was followed by an unpopular decision to abolish the universal Winter Fuel Payment for retired people.
Much of this is seen as political preparation for further spending cuts and/or tax rises in the October budget. Since the Labour Party has built much of its image on being the antidote to “Tory austerity”, the former will be far less palatable for the Chancellor than the latter.
The big question, therefore, is which taxes might rise in 2024-25 – and by how much? Labour ruled out any increase to taxes on “working people” in its manifesto in the general election campaign. This specifically mentioned income tax, VAT and National Insurance (NI).
However, the last (NI) has been called into question as the government has repeatedly refused to rule out the possibility of levying NI on employer pension contributions. In effect, this amounts to a “tax on workers”, leading some pundits to accuse the government of already breaking its manifesto pledge.
Given Labour’s ideological base and the backlash it has already received in the polls for the above, the party may be more inclined to target “wealth-related” taxes in the Autumn Statement to avoid further political damage.
How SEIS and EIS could help investors
The Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) are less well-known and less understood than other tax reliefs and vehicles. In the past few months, speculation about rises to wealth-related taxes has mainly focused on capital gains tax (CGT), pensions (e.g. the 25% tax-free lump sum) and inheritance tax (IHT).
Few analysts have predicted significant changes to venture capital (VC) schemes. Indeed, Labour recently confirmed that it would extend the “sunset clause” for EIS and VCTs a further ten years, until 5 April 2035. The government seems enthusiastic about both: “Extensions will support start-ups and entrepreneurs to help them grow and rebuild Britain …Thousands of entrepreneurs and start-ups are set to benefit.”
This is not to claim that there is no possibility of changes to EIS, SEIS or VCTs in the Autumn Statement. However, the political conversation so far has not featured them heavily. Indeed, changes to more commonly-known taxes – e.g. capital gains tax – could even inadvertently benefit the early-stage investment landscape.
For instance, suppose predictions about an increase in CGT rates come true on the 30th of October 2024. Perhaps the government equalises CGT rates with income tax rates, as the Conservative government did in the late 1980s. If so, more investors might flood to EIS funds and investments as they seek to defer tax on chargeable gains (e.g. to a time when CGT rates are reduced).
If the headline rate of IHT (currently 40%) is raised, or other tax reliefs/exemptions are changed (e.g. the 7-year rule or the annual exemption), then EIS could also become more attractive. EIS shares are excluded from the value of an estate if held for at least two years.
However, some commentators have speculated that the government could change Business Property Relief, which could affect this EIS benefit. The likelihood of this happening is debatable since the Financial Times reported in December 2023 that Labour had no plans to change BPR. Indeed, doing so would likely undermine the government’s “pro-growth” agenda by disincentivising investment.
What should early-stage investors make of all this? Firstly, they can take some comfort in that venture capital does not appear to be in the Chancellor’s main crosshairs. However, investors would be foolish to be complacent. Unfortunately, nobody can know the government’s plans except those in their inner circles.
The Chancellor’s decision to scrap the universal Winter Fuel Payment was not expected. Moreover, the government introduced VAT on private school fees, despite driving 10,000 students out of schools and possibly costing the exchequer more in tax revenue than it will raise. These actions suggest that the government is willing to make unexpected, unpopular decisions which may have unintended consequences.
Investors would do well to seek independent financial advice to ensure maximum manoeuvrability if certain tax rules change in the Autumn Statement. Utilising a wide range of tax-efficient vehicles – e.g. pensions, ISAs and VC schemes like EIS – could help investors protect their overall asset base if any significant changes arrive in specific areas.
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