There are a number of tax-efficient investments you may wish to consider in order to reduce your tax liability.
The first and most obvious is an Individual Savings Account (ISA), which are available to all UK resident individuals aged 18 or over. The annual overall subscription limit for an ISA for 2022/23 remains at £20,000 with no provision to carry-forward unused allowances into later years. ISAs can be invested in cash or certain investments such as stocks and shares. There are also Junior ISAs available for those under 18 with an annual limit of £9,000. The main benefit of ISAs is that Income Tax and Capital Gains Tax (CGT) do not apply and additionally when an ISA is inherited from your spouse or civil partner on their death, it can continue to qualify as an ISA.
Those wishing to invest in start-up companies may also consider the following investment vehicles:
Enterprise Investment Scheme (EIS)
It’s possible to invest up to £2m in EIS, provided anything over £1m is invested in ‘knowledge-intensive’ companies. These are companies that carried out research, development or innovation at the time they issued, or are issuing shares. You receive an Income Tax deduction of up to 30% of the EIS investment and the subsequent disposal of your EIS shares is potentially exempt from CGT, subject to various conditions being met. You also have the option to defer capital gains on assets disposed of three years before or up to one year after your EIS investment, equal to the amount invested.
Seed Enterprise Investment Scheme (SEIS)
You can invest up to £100,000 in the year and receive an Income Tax reduction of 50% of the investment, potentially wiping £50,000 off your Income Tax bill, and the subsequent disposal of your SEIS shares is potentially exempt from CGT, subject to various conditions being met. Furthermore, you can claim to exempt 50% of a capital gain from CGT in the year if you reinvest the amount of the gain in a SEIS investment (i.e. a gain of up to £50,000). Provided the various individual and company conditions are met within the 3 years following an investment, the gain remains exempt from CGT.
Venture Capital Trust (VCT)
A VCT might be suitable for you if you are prepared to invest in higher risk funds. You can invest up to £200,000 in a year and receive an Income Tax reduction of 30% of the investment and the subsequent disposal of your VCT units is potentially exempt from CGT, subject to various conditions being met. However, unlike EIS or SEIS, there is no scope to carry back the subscription to the previous tax year and no associated CGT but on the other hand VCT dividends are exempt from Income Tax.
What should you do?
Consider maximising your ISA allowance for the year if you have not already done so.
If you are interested in making investments in EIS, SEIS and VCTs, consider whether one prior to 5 April 2023 would be appropriate. It’s also possible to carry back any EIS/SEIS subscriptions made in the current tax year to 2021/22, providing the EIS/SEIS limit has not been exceeded in that year. As the 2021/22 Self-Assessment filing and payment deadline has now passed, this should generate a tax repayment.
If you’re in a position to consider deferring capital gains on assets disposed of, you may wish to consider whether a deferral would be appropriate now. When a deferred gain recrystallises, it is subject to the rate of CGT at that time and so there is a risk that a higher CGT rate could apply in a future tax year.
Start-up companies are notoriously high-risk investments and so clearly there are more than just the tax implications to consider.