As part of our Friday Focus feature on what might be coming in next month’s Budget, Anveer Shah, Senior Manager in the Corporate Tax team at Andersen LLP, explores how advisers can help businesses prepare for possible personal tax reforms—and why schemes like SEIS and EIS could be vital for future investment and innovation.
The big question ahead of Rachel Reeves’ highly anticipated Autumn Budget is how will she fulfil her promise to re-boot the sluggish economy after months of uninspiring growth figures? Reeves has insisted that she remains determined not to raise taxes on working people, and with recent additions to the Treasury including the Resolution Foundation’s former Chief Executive Torsten Bell and Senior Economist Dan Tomlinson – both voted in as MPs in the 2024 election – speculation is rife that the Budget may feature reforms to Inheritance Tax (IHT) and Capital Gains Tax (CGT).
Business taxes may remain stable, but the wider impact should be considered.
While much media attention has focused on the rumoured alterations to personal taxes, little has come out implying any kind of major transformation of business taxes. If this holds true on Budget Day, the stability around corporation tax rates and reliefs will aid business planning going forward.
Personal tax changes could influence corporate growth and investor behaviour.
That being said, the speculated reforms to personal taxes and the seeming stability of corporate taxes should not be considered in isolation from one another. Should the reforms to IHT and CGT take place as predicted, businesses should be mindful of the potential impact on their investors and what this means for corporate growth and development. From an investor perspective, we should be asking whether investors can help to drive economic growth in the UK while also looking after their own tax position.
Government schemes could make investment in early-stage businesses more attractive.
Initiatives such as the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) are government schemes to encourage investment in early-stage businesses that are typically considered high-risk. Generally, early-stage companies pose a higher risk that investors will not see a return for their investment, but in the wider economy they are crucial for driving innovation and growth. To make investment more attractive, the government introduced initiatives such as SEIS and EIS to offer tax relief to investors on both the initial investment and on a final exit.
SEIS and EIS rules and reliefs provide incentives for investors.
If the Autumn Budget does bring increases to IHT and CGT, government schemes like the SEIS and EIS could become even more attractive to investors because of the tax reliefs they offer, and business should be mindful of this when seeking investment. This is on the proviso, of course, that the current reliefs are not also tweaked by the Chancellor on 26 November.
Broadly, the SEIS is for very early-stage companies that have been trading for less than three years, and the EIS is designed for start-ups that have outgrown SEIS and are now medium-sized companies.
As matters currently stand, it is possible to invest up to £200,000 in SEIS-eligible companies each tax year and claim up to 50% of this back through Income Tax relief. For example, after investing £50,000 through SEIS, you could claim back £25,000 at the end of the tax year, effectively halving the capital outlay for your investment. The SEIS also offers capital gains relief, specifically no capital gains tax arises on the gain from the sale of shares as long as you have held the shares for a minimum of three years and you have received income tax relief on that investment which has not been reduced or withdrawn at a later date. With tax relief on both the initial investment and a final exit, it’s clear to see why these schemes would be attractive for investors and even more so if CGT rates increase.
As regards the EIS, it too comes with appealing tax relief rules, much of it mirroring the fundamental aspects of SEIS. With Income Tax relief, you can invest up to £1m – £2m for knowledge-intensive companies and claim up to 30% of this back. In line with the SEIS, there is no capital gains tax on the gain arising from the sale of shares provided that you meet the same conditions.
Complexity and certainty remain key considerations for investors.
These tax reliefs may be attractive for investors, but to what extent are people put off by the complexity of the rules and the mechanisms for withdrawing relief? One of the government’s key messages is that stability and certainty aid business planning and growth, and so too does certainty around tax relief. The simplification of these government schemes may see an increase in the number of taxpayers taking advantage of them, which could help to drive the economic growth the government is targeting.
Tax reliefs help mitigate, but not eliminate, investment risk.
Tax reliefs may sound enticing on paper but to what extent do they mitigate the risk that your investment in an early-stage business could still make a loss? Crucially, if you sell SEIS or EIS shares at a loss you can choose to set the loss amount – less any income tax relief already received – against your income tax or CGT liability. Although an investment using these schemes can still leave you with net losses, they do go a significant way to mitigate the risks by providing tax relief at both the initial investment stage and on a final exit. These tax reliefs work best when considered in the round, by an investor with a portfolio who may see positive and negative returns on their investments. The upfront income tax relief can work well especially in cases where the investment does not generate positive returns in the future, and the capital gains relief is particularly useful for those investments that do see an increase in value.
Investors and businesses should think about growth and personal tax together.
At a time when economic growth is key and personal taxes look as though they may increase, investors should consider whether they can do their bit to drive economic growth and protect their own personal tax position in tandem. It is well understood that microeconomics is not detached from macroeconomics, and when listening to the Autumn Budget on 26 November, investors and businesses alike should bear in mind that nor are the personal taxes on a micro level detached from the corporate.
Anveer Shah is a Senior Manager in the Corporate Tax team at Andersen LLP
