UK investors fear that capital gains tax limits will be cut have forced wealthy investors to rethink their current portfolio. Wealthy savers who fear that Rishi Sunak will soon raise taxes are pouring millions of pounds into EIS tax-efficient investments to shelter their money.
Investors have put nearly £10 million into funds that support start-ups and small businesses in the two weeks since November 11, the day a government-commissioned report into a rise in capital gains tax (CGT) was released. This was 56 per cent higher than the amount invested in such funds in the previous two weeks.This money was invested in Venture Capital Trusts (VCTs) and the Enterprise Investment Scheme (EIS), which come with significant tax advantages as well as an increased risk associated with start-ups and growing companies.
If CGT changed to income tax rates, this would mean a higher rate income taxpayer who cashed in shares would pay 40 per cent tax on their profits, compared with 20 per cent at the moment. Adme owners and landlords would also be affected, because they pay CGT additional rate taxpayers would pay 45 per cent, instead of 20 per cent. Second-ho their gains. The OTS said that the increase, along with lowering the CGT threshold from £12,500 to £4,000, could raise £70 billion in five years to pay for the pandemic.
Accountants and City brokers – Including us at Charter and May – said they had been inundated by calls from company bosses and senior executives looking to sell their stock and other investments due to the potential changes in CGT.
Investors are now shifting to VCTs and EIS schemes which were set up in 1994 to support entrepreneurs and help raise finance for them.
You can invest up to £200,000 in new VCT shares each year and get 30 per cent income tax relief a year, provided that you hold the shares for five years. You also get tax-free dividends and will not pay any CGT when you sell.
Those who invest in EIS schemes can also claim 30 per cent income tax relief on investments up to £2 million a year, and gains are CGT-free.
If you have a chargeable gain, such as from selling an investment property, and invest in EIS, it is possible to defer that gain to the following tax year and any CGT due on it for as long as you remain invested in the EIS.
The type of start-ups raising funds through the schemes has changed over the pandemic, with a focus on digital apps and online learning and games.
Bond Healthcare, a digital platform for the medical testing industry, raised its £400,000 target in less than a minute after it went live in May and a further £1 million last month.
Other companies that have raised money include Azoomee, a children’s gaming and educational app, which has raised £6.4 million, and Visionable, a video collaboration app for healthcare teams that has been nicknamed the Zoom for medics. It has raised £2 million so far.
‘I’m moving out of stocks’ Andrew Irving, 53, from Cumbria decided to sell some of his shares in case capital gains tax rates rise next year.
“If CGT was to be aligned to income tax I’d be looking at a rate of 45 per cent instead of 20 per cent,” said Andrew, who works in financial services. “I decided to crystallise gains now.”
He said that, if the chancellor does raise CGT rates, he would move more money into EIS investments. “Not only do they have the 30 percent income tax relief and tax-free growth, but also potentially the deferral of capital gains from the sale of other investments at up to 45 per cent for additional rate taxpayers.
For more information about EIS tax benefits and whether or not you could benefit, see our tax benefits page or get in touch with one of our team members today.
Source: The Times, ThisIsMoney, www.EISA.org.uk.