Jamille Cummins
1 Nov 2024
In the wake of the recent UK budget announcement and an increase in Capital Gains Tax (CGT), investors face new challenges. Between 2022 and 2024, the tax-free allowance for CGT was significantly reduced, from £12,300 to £3,000, and now the Labour Party’s budget includes further CGT rate hikes. These changes have left many investors searching for effective ways to enhance their tax efficiency. Fortunately, the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) continue to offer compelling benefits for tax-efficient investing, particularly valuable for those focused on supporting small and high-growth potential UK businesses.
This article unpacks the implications of the budget and highlights why sophisticated investors should still consider SEIS and EIS as an advantageous approach.
Understanding the Recent Capital Gains Tax Increases
The latest tax hike will impact a wide range of asset classes, reducing post-tax returns and making it even more challenging for investors to achieve the same growth potential in traditional investments. For instance, the drop in CGT tax-free allowance from £12,300 to £3,000 places added pressure on portfolios, especially for those with gains accrued over years of holding assets. The broader CGT increase only exacerbates this challenge, compelling many investors to look toward alternative, tax-advantaged investment options.
EIS and SEIS: Tax-Efficient Investment Solutions
In this shifting tax landscape, the SEIS and EIS schemes provide a range of benefits that can help investors optimise their tax exposure while contributing to the UK’s startup ecosystem. Both schemes were created to attract capital to high-potential companies, with the UK government offering robust incentives to investors as a reward for supporting growth and innovation in the economy.
Key Benefits of EIS Investments:
CGT Exemption on Gains: For investors holding EIS shares for at least three years, any profits made upon selling these shares are exempt from CGT, offering a unique advantage amid rising tax rates.
CGT Deferral on Gains from Other Investments: Investors can defer CGT on gains from other investments if these gains are reinvested into EIS shares, allowing for greater flexibility in managing their overall tax burden.
30% Income Tax Relief: EIS provides 30% income tax relief on investments up to £1 million per year, meaning investors can reduce their income tax liability by up to £300,000 annually.
Key Benefits of SEIS Investments:
Higher Income Tax Relief: SEIS investors can receive 50% income tax relief on investments up to £100,000 per tax year, making it an attractive option for those supporting younger, earlier-stage companies.
CGT Exemption on SEIS Gains: SEIS shares held for at least three years are also exempt from CGT.
Capital Gains Reinvestment Relief: SEIS offers a 50% capital gains reinvestment relief, allowing investors to reinvest their gains in SEIS-eligible companies while significantly reducing their tax exposure.
Performance of EIS and SEIS Schemes: A Snapshot of Recent Data
Despite recent economic headwinds, EIS and SEIS have remained vital sources of funding for startups across the UK, although funding decreased in the 2022-2023 tax year.
Enterprise Investment Scheme (EIS):
In 2022-2023, 4,205 companies raised £1,957 million under the EIS scheme, a 15% drop from the previous year’s £2,297 million.
The Information and Communication sector led the way, attracting £660 million, representing 34% of all EIS investment.
London and the South East attracted the highest levels of investment, totalling £1,280 million (65% of all EIS investment).
Seed Enterprise Investment Scheme (SEIS):
During 2022-2023, 1,815 companies raised £157 million through SEIS, a 24% decrease from the prior year.
First-time SEIS investments accounted for a substantial share, with 1,440 companies raising £137 million.
The Information and Communication sector again dominated, securing £62 million, or 39% of total SEIS investment.
London and the South East attracted £102 million (65% of SEIS funding), reinforcing the region’s central role in the UK’s startup ecosystem.
The Strength of the UK’s Startup Ecosystem
A report by Dealroom highlights the strength of the UK’s startup ecosystem, now worth over $1.1 trillion and ranked as the third most valuable globally. This status is backed by several factors, including world-class education hubs, a thriving job market, and a regulatory environment supportive of entrepreneurship.
The sustained success of the UK startup ecosystem underscores the opportunities for investors looking to diversify and access high-growth sectors, especially as SEIS and EIS investments continue to play a vital role in this ecosystem’s development.
Diversifying and Driving Economic Growth
The budget's CGT changes can be a catalyst for sophisticated investors to embrace SEIS and EIS schemes. Investing in these early-stage, high-potential companies not only offers substantial tax savings but also supports a dynamic ecosystem that continues to drive UK innovation, job creation, and economic growth.
For those seeking to maintain tax efficiency in a high-CGT environment, SEIS and EIS investments are invaluable. By allocating capital toward innovative companies across tech, communications, and other high-growth industries, investors can realise attractive returns while benefiting from the UK’s most generous tax reliefs.
Final Thoughts: A Strategic Opportunity for Savvy Investors
While the budget's CGT hikes may challenge traditional portfolios, SEIS and EIS provide an effective strategy for minimising tax liability and capitalising on the UK's robust startup ecosystem. These schemes remain highly advantageous for sophisticated investors committed to tax efficiency and a diversified portfolio. As CGT rises, the SEIS and EIS schemes stand out as critical investment tools enabling investors to achieve meaningful returns while supporting the next generation of UK entrepreneurs.
At Pinnacle Global Advisory, we specialise in aligning sophisticated investors with high-growth, SEIS and EIS-eligible startups that show promising potential in key sectors such as technology, climate, and innovation-driven industries. Our advisory services provide investors with carefully selected opportunities that leverage the tax advantages of SEIS and EIS while supporting transformative companies in the UK’s thriving startup ecosystem. By partnering with Pinnacle and its seed investment focus syndicate, Pinnacle Capital, investors can gain access to a curated pipeline of ventures that align with their financial goals and values, combining the potential for high returns with impactful investments that drive sustainable growth.
Disclaimer: This article does not constitute tax advice. Anyone considering investing in SEIS or EIS-eligible startups should seek guidance from a regulated tax practitioner. Investing in early-stage companies is inherently risky, and you should be prepared to lose all of your investment.