The Benefits of Backing British Business for Investors in 2024

In keeping with this support for small businesses, the chancellor announced a ten-year extension to the Enterprise Investment Scheme and Venture Capital Trusts until 2035 in his 2023 Autumn statement. For high-net-worth individuals, with the right risk profile, this presents an excellent tax-efficient opportunity to invest in early-stage British businesses and gain exposure to the potential growth of these innovative companies.

There continues to be huge demand for VCT investing. In the 2022/23 tax year, VCT fundraising surpassed the £1 billion milestone for the second time (£1.08 billion, according to the Association of Investment Companies). The scale-up companies that the scheme supports are the lifeblood of the UK economy and the VCT scheme enables them to grow, innovate and create vital employment opportunities.

Venture Capital Trusts (VCTs)

Introduced to encourage investors to support early-stage British businesses, VCTs can help investors diversify their investments, complement existing pension plans. While VCTs offer a higher risk profile they offer a range of tax incentives to compensate investors for the risk they are taking with their money. VCTs are high-risk investments, and you may not get back the amount you invest.

As well as offering upfront income tax relief of 30%, any profits made from the sale of VCTs are free from capital gains tax. Another key reason why investing in VCTs can be particularly attractive is that the annual allowance is £200,000 with no reduction for high earners. This is ten times the amount you can invest in an ISA.

• You can invest up to £200,000 per tax year.
• Claim up to 30% tax relief provided you keep your VCT shares for at least five years, otherwise you will lose the relief.
• You can only claim tax relief in the tax year you invest.
• There is no capital gains tax (CGT) to pay when you dispose of the VCT.
• You do not need to pay Income tax on any dividends from a VCT.

Understanding the risks

Investing in small, unlisted, or AIM-listed companies and VCTs should be considered as high-risk. Investments in smaller companies can fall or rise in value much more sharply than shares in larger, more established companies. They also have a higher rate of failure. You should be prepared to hold VCT shares for a minimum of five years. If you decide to sell your shares before then, you will be required to repay to HM Revenue & Customs (HMRC) any upfront income tax relief you’ve claimed.

Enterprise Investment Scheme (EIS)

The EIS (Enterprise Investment Scheme) was introduced by the government in 1994 to help small companies raise funds and grow. Companies that qualify for EIS are small and usually privately owned, although they can be listed on AIM. There are two ways to invest in EIS: by investing directly in a single EIS-qualifying company or by investing through an investment manager that builds up a portfolio for you.

Investors can benefit from a mix of upfront and ongoing EIS tax reliefs:

• You can invest up to £1m (or £2m if anything above £1m is invested in knowledge-intensive companies).
• Claim up to 30% tax relief provided you keep your EIS shares for at least three years and the company remains EIS qualifying for the same period, otherwise you will lose the relief.
• You can claim tax relief in the tax year you invest or before you make the investment – if you choose to treat some or all of the investment as being made in the previous year. You cannot carry forward unused Income Tax relief to future years.
• Enjoy tax-free growth (when income tax relief is already claimed, and shares are held for at least three years).
• Defer capital gains from other investments sold and reinvested in EIS shares.
• You can pass on your investment free of IHT if held for at least two years at time of death.
• Offset any future losses on EIS shares against Income Tax.

Plant a seed for British Business

Like the EIS, the Seed Enterprise Investment Scheme (SEIS) rewards investors with significant tax savings when they invest in companies that qualify for SEIS status. Typically, these are smaller and younger companies than those qualifying for EIS, which means they are also riskier investments.  To help offset this heightened risk the government offers even more generous tax reliefs as follows:

• The maximum annual investment you can claim relief on is £200,000.
• SEIS Investments qualify for 50% tax relief - A £100,000 investment could provide a £50,000 saving on that year’s income tax bill. To claim this, you must have sufficient income tax liability in the first place and hold the shares for at least three years.
• Investors are entitled to 50% Personal Capital Gains Tax relief on your initial investment, capped at £100,000.
• Carry back contributions to the previous year, assuming you have the allowance. Meaning you could potentially invest up to £400,000 in one go. Carry back also gives you the option to offset the tax relief against the previous year's tax bill, so you could potentially get back tax you've already paid.
• Loss relief - If things don’t go to plan, you can choose to offset any loss, less the income tax relief received, against your income tax bill. So, an additional-rate taxpayer could effectively reduce a total loss of £1 to 13.5p once all the tax reliefs available have been taken into account.
• Inheritance tax relief - An investment in a SEIS-qualifying company should benefit from 100% relief from inheritance tax, provided the investment is held for two years and at the time of death.

Don’t invest unless you’re prepared to lose all the money you invest. This is a high-risk investment and you are unlikely to be protected if something goes wrong

Alternative Investment Market (AIM)

Another tax efficient way to invest in UK businesses is to own shares in unquoted companies such as those listed on the Alternative Investment Market (AIM). Doing so can potentially reduce a future Inheritance tax liability.  Most AIM companies qualify for what’s called Business Relief (BR), and under current UK tax rules any shares in these companies can be passed on free of IHT once you have held them for two years.

But investing in AIM shares isn’t just about saving IHT. Whilst AIM companies are higher risk than the average equity portfolio, the market has become a lot more mature, so offers real potential for capital growth.

Navigating your way around the AIM market is not easy. Not all AIM companies qualify for Business Relief, and there is greater volatility in the market. Our AIM portfolio runs on a discretionary managed basis by our specialist in-house AIM Team so you don’t have to deal with what can be a complicated Investment Management process in an already complicated market.

Know where life can take you.

Our investment and financial planning teams can support high net worth clients looking to invest in Venture Capital Trusts and wider alternative investments. Our expert financial planners can also help you navigate the complexity of UK taxes, make the most of your available allowances and reliefs, and identify the best investment structures to preserve, grow or pass on your wealth.

Tax treatment is dependent on individual circumstances. This information is provided in good faith and is based upon our understanding of current tax law and HMRC practice, which may be subject to change in the future.

This article does not offer advice and the content and information about potential investments and services are designed for general use, and so cannot be considered personal to your circumstances or your financial position. It is important to obtain professional advice from an accountant or tax specialist before taking any action or making any decisions.