Say goodbye to that allowance
Feel that? That was the feeling of the annual capital gains exempt amount reducing by more than half, and if you didn’t feel it yourself, your accountant certainly did.
As of April 2023, the annual capital gains tax exempt amount has been reduced from £12,300 to £6,000. This means that for any gain you realise – such as the profit made on selling a second home, or perhaps more importantly for investors, on selling stocks or shares – you will have to pay tax on everything over £6,000 of it.
Quick example: Bought shares at £10,000, sold them at £20,000 -> £10,000 profit, £6,000 exempt, capital gains tax is payable on £4,000.
If you’re already adjusted to this new reality, don’t get too comfortable. In April 2024, the exempt amount will be halved again to £3,000.
What should investors be doing?
For anyone who wasn’t already thinking about capital gains tax, with these changes, they should start thinking about it now. The 2020 to 2021 tax year saw record amounts of capital gains and tax recorded by HMRC, and with the changes in the allowance, these are only set to increase.
Thankfully, there are options to overcome capital gains tax.
Invest in an EIS fund.
The Enterprise Investment Scheme is a government initiative that was set up to incentivise investments into new British businesses. The incentives include a very attractive assortment of tax reliefs across income tax, inheritance tax, and – most important here – to capital gains tax.
Let’s focus on the capital gains tax benefits. Investing in an EIS fund gives investors the ability to:
Defer capital gains tax by investing an amount equal to the gain
Dispose of EIS shares without paying any capital gains tax on any gains they may have realised.
What does that mean?
Let’s start with deferral relief. This allows investors to defer paying capital gains tax if they invest an amount equal to the gain in an EIS fund or company.
You buy shares in a publicly traded company for £10,000 and sell them for £50,000. Capital gains tax is now due on that £40,000 profit, less the annual exempt amount of £6,000. So £34,000.
(As this is a sale of shares, the rate of CGT is 10% for basic rate taxpayers, and 20% for higher rate. If it was a sale of residential property, the rates would be 18% and 28% respectively.)
If you invest the taxable gain from that sale – £34,000 – into EIS qualifying companies, either directly or through a fund, you can defer paying capital gains tax on that amount for as long as you hold those shares.
Generally, you can expect an EIS investment to take anywhere from five to ten years to mature, so once the investment reaches the end of its lifecycle, that capital gains tax will become payable again. Of course, you can simply invest an amount equal to the gain again at that point, and continue to defer it.
In this way, EIS offers investors a way to reinvest and put their money to work supporting the next generation of British businesses, supporting the economy, and nurturing innovation and development, instead of just handing it over to the tax man. But it gets even better.
Capital gains tax deferral is just one of the benefits available through EIS, and even though this was the motivation for investing in this case, you are still entitled to claim all the other tax benefits. These include 30% of your invested amount as income tax relief, loss relief, and exemption from inheritance tax on disposal of your EIS shares.
The final cherry on top is the chance for returns. This is a high risk investment, and there is no guarantee that it will generate a return, but any given portfolio might contain tomorrow’s biggest new tech businesses, and could potentially deliver returns anywhere from 3x to 10x or higher.
Note that EIS shares must be held for a minimum of three years in order to qualify for tax reliefs. If they are disposed of in less than three years, any tax relief claimed may need to be paid back.
Disposal relief is much simpler: EIS shares are exempt from capital gains tax on disposal, provided you have held the shares for at least three years. So when a company exits at 10x and you want to sell your shares, there is no capital gains tax to pay on that gain.
Where to start?
When choosing an EIS fund, the things to look for are how they make their selections of companies to invest in, how large the portfolio they build for you will be, how long they take to deploy your investment, and how they manage the EIS paperwork.
Because venture capital returns follow a power law distribution – that is to say, a small number of companies generate an outsized proportion of the returns – large, diverse portfolios make the most sense for investing in startups. Many funds claim they are experts at picking a small selection of companies that are likely to succeed, but in reality, there is no way to guarantee which companies will succeed or fail.
How does the fund choose companies? In many cases, a fund manager chooses companies to invest in. Our approach with the Access EIS Fund is different. We co-invest in deals that are brought to us by our network of experienced angel investors. This group of investors have been selected for their proven track record of outperforming the average market performance of the VC market as a whole.
When you invest in EIS you’ll receive an EIS3 certificate for each company you invest in. To quickly address a commonly held misconception: it’s not necessary to submit a separate tax return for each company you hold shares in. But you’ll need to have access to these certificates in case HMRC requests them.
Access EIS is one of the few funds that stores investors’ EIS documentation digitally so that investors can easily access and download it from their personal dashboard. We also allow investors to login and view their portfolio at any time, so you can check on who’s up and who’s down whenever you like.
The Access EIS Fund
Our fund co-invests with proven angel investors to build large portfolios of hand-picked companies for our investors. It’s a high risk investment, and we can’t guarantee that every startup will be a unicorn, but we’re confident that our approach is the smartest on the market. Even better, we can show you the data to prove it.
If you’re interested and would like to find out the benefits of investing towards the start of the tax year, you can call us on 01223 478 558 and we'll be happy to answer any questions you might have.
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