The budget and beyond
Much of the recent news from the UK points towards lower growth expectations for the British economy. On the positive side, the latest US inflation numbers have seen the pound rebound and asset prices soar, though how indicative this is of long term trends remains to be seen. These are difficult times for startups too, as they have to sell products to consumers facing the cost of living crisis and corporations that are trimming their budgets. They also have to contend with venture capital firms holding back on new investments and focusing on their portfolios.
You might be wondering what the argument is for investing in EIS right now?
I’d boil it down to two main points. Firstly, the tax breaks are guaranteed (as long as the investment is held for three years). Investors can claim 30% income tax relief as a start, capital gains deferral and disposal tax relief, exemption from inheritance tax on your EIS shares, and loss relief.
With the reduction in the higher rate tax threshold (£150,000 to £125,000) announced in the autumn budget, and a significant reduction in the annual exemption for capital gains tax (from £12,300 to £6,000 next year, and then to £3,000 from April 2024) now is a good time to take advantage of the tax reliefs EIS investments offer in order to offset any additional taxation you may find yourself subject to.
At the same time, the autumn budget reduced the tax free allowance on dividends (from £2,000 to £1,000 next year, and further to £500 from April 2024). This could affect some more traditional investments in stocks or listed funds, potentially making alternative investments in EIS, SEIS or VCT more appealing.
Secondly, the leanest and most dogged firms with good product market fit will emerge from this downturn. This is when blockbuster startups are forged. There will be failures (and further tax relief) but there will be big winners. That is why we don’t advocate for timing the market, but rather being in the market and having a large portfolio of companies which could be the next 100X story.
A final point relates more broadly to the economic situation Britain is currently facing and the potential for economic growth represented by a flourishing startup ecosystem. Sustained investment in the future of British businesses and our reputation as a powerhouse for innovation, in addition to the benefits to individual investors, stands to benefit the economy and the country in the longterm. It's to be expected that many small businesses won't make it, but those that do have the potential to be transformative for Britain.
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