The UK tax system contains many reliefs and allowances for individuals, providing legitimate tax savings or deferrals for those who qualify.
Examples include relief for charitable donations, for pension contributions, for investments in certain tax-favoured schemes such as Venture Capital Trusts and the Enterprise Investment Scheme. However, with the government keen to raise revenue but constrained by previous promises not to increase income tax, national insurance or VAT, the abolition or restriction of tax reliefs presents options.
Relief for pension contributions has already been restricted to a maximum of £40,000 per annum (less for those earning over £150,000 per annum). An attempt to restrict relief for charitable donations in the 2012 Budget lead to such an outcry that government reversed that announcement although the restriction to relief for trading losses did go ahead from April 2013. Relief against rental income for mortgage interest paid is also being restricted to basic rate relief over four years from April 2017. Almost every Budget seems to announce or propose restriction of one relief or another, so with another Budget approaching on 22 November, what’s next?
The Enterprise Investment Scheme (EIS) provides income tax relief at 30 per cent for investments in qualifying high risk companies, as well as capital gains tax exemption on disposal of the EIS company shares provided they’re held for the qualifying period. Deferral of capital gains tax on disposals of other assets can also be achieved by making EIS investments. The EIS has been a useful source of finance for start-up companies: since its introduction in 1994, it’s enabled investments of £15.9billion in around 26,000 companies.
However, there’s a perception that the EIS enables wealthy individuals to avoid paying tax, especially those who invest the permitted maximum of £1million per annum, saving up to £300,000 of income tax. EIS and its younger sister, the Seed Enterprise Investment Scheme (SEIS) were reviewed as part of a consultation paper on 'patient capital' this year and it’s possible the November Budget may make changes to one or both. Complete abolition of either would seem unlikely given the government’s desire to encourage entrepreneurs, but restrictions to the reliefs could be introduced: cutting tax relief levels from 30 per cent to say 20 per cent, increasing the period the EIS company shares are held, or placing greater restrictions on companies which qualify for funding are possibilities. Individuals who are considering EIS investments may want to buy now while stocks last.
For more information please comment below or get in touch with Karen Clark.