Wealthy investors are increasingly turning to start-ups to ease their tax burden, especially as a potential rise in capital gains tax (CGT) looms in the upcoming Budget.
According to the Wealth Club, investments in Seed Enterprise Investment Schemes (SEISs) increased by 250% between July 4 and September 16 this year, with savers hoping to reduce their CGT liabilities by as much as 50%.
The spike in SEIS investment coincides with government efforts to boost economic growth by encouraging investment in small UK businesses. SEISs allow investors to invest up to £200,000 annually into start-up businesses, providing significant tax benefits including a 50% income tax reduction and exemption from CGT on any profits from the investment. Crucially, they also offer a 50% relief on CGT on the sale of other assets, such as buy-to-let properties, when reinvested in eligible SEIS companies.
With CGT reform expected in the Budget, investors are seizing the opportunity to take advantage of the extended SEIS tax benefits, which have recently been extended until 2035. A higher rate taxpayer reinvesting a £100,000 profit into a SEIS fund could reduce its CGT bill from £24,000 to £12,000, while also securing £50,000 in income tax relief.
Nicholas Hyett of the Wealth Club points out that high net worth individuals are increasingly using SEISs to protect future profits from tax, given the likelihood of changes to CGT, inheritance tax and pensions. “It’s no wonder that wealthy investors take advantage of schemes that provide upfront tax relief while protecting future profits,” says Hyett.
However, SEIS investments come with significant risks. While the tax breaks are intended to offset the high risk of backing startups, investors should be aware that about half of SEIS companies will fail within five years. Nevertheless, successful start-ups such as Swytch Bike, snack company Olly’s and nutritional supplement maker Hunter & Gather emphasize the potential benefits.
Enterprise Investment Schemes (EISs) and venture capital funds (VCTs), on the other hand, offer less generous tax benefits, although they remain popular with wealthier investors. EISs allow up to £1m of annual investment with 30% income tax relief and deferred CGT, while VCTs offer tax-free dividends and CGT relief, with investments managed through a fund to help spread risk.
These schemes are not intended for risk-averse people and should form only a small part of a wider, more regular investment portfolio, experts advise. Jason Hollands of Evelyn Partners warns that while minimum holding periods for tax credits are set at three years, exits from these private companies are dependent on finding a buyer, which is not guaranteed.
Despite the potential for high returns, investors are also urged to consider the higher costs associated with SEIS funds. Fees may include an initial fee of 2.5%, along with management and performance fees that may increase over time. Investors should carefully assess the risks and rewards before jumping into these niche, high-risk programs, where tax benefits alone should not drive decision-making.