Chancellor John Healey reversed his predecessor Rachel Reeves’s planned reduction in the cash Individual Savings Account (ISA) allowance in the Autumn Budget today, preserving the existing £20,000 annual cash ISA allowance.
The decision protects an additional £8,000 of annual cash ISA contributions from the proposed cut. It does not, however, give each saver £8,000 of tax relief. Cash ISAs shelter interest from income tax: the benefit depends on the interest earned and whether that interest would otherwise be taxable.
For investors seeking direct reductions or deferrals in their income tax and capital gains tax bills, the wider landscape offers other options.
Two established schemes deserve particular attention: the Enterprise Investment Scheme (EIS), introduced in 1994, and the Seed Enterprise Investment Scheme (SEIS), introduced in 2012. Both encourage investment in qualifying young and growing businesses (and in the case of EIS, qualifying technology-heavy businesses) through income tax and capital gains tax reliefs.
Under the Government’s current regime, investment made under SEIS offers 50% income tax relief on qualifying investments of up to £200,000 per tax year (or relief can be elected to be carried back to the previous tax year). A full investment of £200,000 would therefore reduce an eligible investor’s income tax bill by £100,000.
Similarly, the EIS currently offers 30% income tax relief on investments of up to £2,000,000, which can again be carried back to the previous tax year. That’s a maximum of £600,000 per annum of potential income tax rebate at large.
Unlike reliefs which are calculated at an investor’s income tax rate, these SEIS and EIS percentages apply to basic-, higher- and additional-rate taxpayers alike. Investors must have sufficient income tax liability to use the relief and both the investor and investee company must meet the scheme’s conditions as set out in legislation and in guidance by HMRC.
The potential capital gains benefits are also significant.
Crucially, both schemes provide capital gains tax exemption on growth in the qualifying shares themselves, provided the required income tax relief and holding conditions are met. Qualifying losses may attract loss relief, reducing the investor’s net loss. The EIS also carries with it a capital gains deferral mechanism for investment capital which can be highly beneficial to investors who’ve realised a recent capital gain.
Distinction matters. Cash ISAs shelter savings interest. SEIS and EIS reward qualifying investors up-front for accepting the risks of financing young, growing and or technology-heavy businesses. Unlike a cash-only ISA, shares can be difficult to sell, companies can fail, and tax relief can be withdrawn if conditions are breached.
In recognition of the benefit of the schemes, both the SEIS and EIS were preserved in today’s budget and have historically been recognised as key incentives to UK tax-payers to invest, carrying with them often significant tax reliefs.
The tax incentive deserves attention. The underlying investment deserves even more. If you would like to understand whether your company or a company you are considering investing in would be a ‘qualifying company’ under the SEIS or EIS, contact tax lawyer Alexander Massey.
Nothing in this article constitutes financial, investment or tax advice, or a recommendation to invest. Tax treatment depends on individual circumstances and may change. SEIS and EIS investments are high risk, and investors could lose all their capital. Seek advice from an appropriately authorised financial adviser and a qualified tax professional before acting.
