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VCTs and EIS remain alternatives for high earners

16 March 2023

The government did not backtrack on its reduction of dividend and capital gain allowances during the Budget.

By Jean-Baptiste Andrieux,

Reporter, Trustnet

Savers will still have to look elsewhere to avoid some of the government’s stealth rises, according to experts, even after helpful pension changes made in the Budget yesterday.

While the amount that can be put in a pension has been upped from £40,000 to £60,000 and the lifetime allowance has been scrapped, not all will want to tie up their cash for retirement.

ISA allowances were kept stagnant yesterday, while the government forged ahead with plans to reduce tax allowances.

The government halved the capital gain allowance from £12,300 to £6,000 and the dividend allowance from £2,000 to £1,000 from April 2023 during the Autumn Statement in November 2022.

The capital gain and dividend allowances will fall further to respectively £3,000 and £500 in April 2024.

As such, venture capital trusts (VCTs) and enterprise investment schemes (EIS) remain alternatives for high earners, experts have said.

Jason Hollands, managing director of Bestinvest, said that the tax outlook remains bleak despite the abolishing of the lifetime allowance.

In addition to topping up pensions to benefit from income tax relief or migrate investments into ISAs, he suggested that some investors could be interested in higher risk schemes.

He said: “For some, more esoteric tax efficient but higher risk schemes, such as venture capital trusts and enterprise investment schemes, which the government has encouragingly reaffirmed its commitment to, may be worth considering.”

Pensions will remain important and could look even more attractive after the minimum tapered annual allowance rose to £10,000.

As a result, Max Ormiston, assistant fund manager of the Unicorn AIM VCT said that saving into a pension will remain restrictive for many high earners.

He added: “We expect demand for tax-efficient investment products, such as VCTs, to remain robust as an alternative to pension pots for wealthy individuals.”

VCTs investors can invest up to £200,000 each year, claim up to 30% upfront income tax relief on the amount they have invested and benefit from tax-free capital gains and tax-free dividends on their investment.

In comparison, investors can pour up to £1,000,000 per year into an EIS or £2,000,000 if investing in knowledge-intensive companies. It also provides a 30% relief on the amount invested on income tax once investors have held their investment for three years.

In an effort to boost growth, Hunt also announced the creation of 12 new investment zones across the UK in today’s budget.

Matt Currie, head of growth capital at Seneca Partners, said that the Budget set out the government’s ambition to accelerate the economy and unlock the potential of the SME sector.

He added: “Whilst there is little in the immediate detail relating to direct measures to achieve this at individual business level beyond reinvestment tax incentives, the chancellor pledged to make this the focus of his attention in readiness for the Autumn Statement.

“Many of the businesses in the tax advantaged arena are not yet at the stage of reinvesting profits and their funding largely derives from VCTs, EIS and SEIS. The recognition of this at UK government level bodes well for the tax advantaged sector going forward and the critical part it will have in helping these businesses to develop and flourish.”

The government extended the sunset clause for VCT, EIS and the Seed Enterprise Investment Scheme beyond 2025 last autumn.

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