Following the Autumn Statement there were plenty of tax changes announced that will come into effect from April 2023. To identify opportunities for investors we have summarised some of the changes, and how EIS may offer potential solutions.
The Change:
The 45% tax rate from April 2023 will be applied to earnings over £125,140, a reduction down from £150,000, meaning more higher earners will be paying more income tax.
The Opportunity:
Many investors will probably begin by using pensions to reduce their income tax liability; however, the removal of the lifetime allowance has just been announced. The maximum Pension Commencement Lump Sum (PCLS) will be retained at £268,275 (ie 25% of the outgoing LTA) and will be frozen thereafter. Except for people who have a higher PCLS by way of protecting their previous, higher, lifetime allowance. This may mean that a higher rate of tax would be applied when pension benefits are taken.
EIS offers investors the ability to reclaim 30% income tax relief for the tax year of investment and the ability to carry back the tax relief claim against the previous year’s income tax liability. In addition, benefits are tax free when taken, provided certain criteria are maintained, which may offer investors a more tax efficient investment solution.
The Change:
The proposed income tax personal allowance freeze until 2028 will push 3 million people into paying higher rates of income tax by 2026, according to analysis by the Institute for Fiscal Studies.
The Opportunity:
Again, pension contributions may be the obvious option but as mentioned above the freezing of the tax-free Pension Commencement Lump Sum may affect the true tax efficiency of the pension. EIS could offer a tax efficient complement to a pension for your client’s retirement planning.
The Change:
Dividend allowance will reduce from £2,000 to £1,000 from April 2023, and then down to £500 from April 2024.
The Opportunity:
This change will significantly affect income shares not held in tax efficient wrappers, but also company directors who take dividends instead of salary from their companies. Companies sat on large amounts of cash may question whether to pull the cash out and pay tax now rather than wait. EIS, again, will allow 30% income tax relief. Whilst extracting the cash may attract 8.5%, 32.5% or 38.5%, the ability to reclaim 30% would reduce the effective rates directors would pay, whilst moving the funds into a more tax efficient (though less liquid) environment.
The Change:
Capital Gain Tax personal allowance is to be reduced from the current £12,300 to £6,000 from April 2023 – with a further reduction to £3,000 from April 2024. Many investors may be asking the question ‘do I dispose and realize my gains now and pay now?’ or ‘do I want to hold the assets with gains long term (possibly until death)?’.
The Opportunity:
Whether investors choose to realise now and potentially create a capital gain or whether they choose to leave it until later, EIS can offer valuable deferral relief on larger assets such as rental properties, second properties or businesses. This could result in a significant gain which could be managed out using EIS.
Investors who hold investments outside tax efficient wrappers – such as pensions or ISA – should consider the longer-term effects that this may have on their investments. Adding EIS to a modern portfolio not only would offer further diversification, but EIS returns are free from capital gains tax (provided the investments are held for at least 3 years and income tax relief is claimed when investing).
The Change:
IHT thresholds will be maintained at £325,000 for a further two years, which, considering the standard nil rate band for inheritance tax has remained the same since 2009, is probably no surprise.
The Opportunity:
EIS investments qualify for business relief for IHT purposes after two years, provided the shares are also held on death.
In Summary
It was anticipated that this latest Autumn Statement would result in tax changes (and this was reinforced in the recent Budget statement), but where there is change there is opportunity. In the chancellor’s statement he reiterated that the UK have three of the best universities in the world, and that science and innovation are key to unlocking the UK’s growth, supporting our own ethos of backing founders of UK early stage businesses.