Autumn Budget 2024 – What are the impacts on investing in EIS qualifying companies?

Nov 4, 2024

Autumn Budget 2024 – What are the impacts on investing in EIS qualifying companies?

Nov 4, 2024

For those of us away during the school half-term break, the timing of Labour’s first budget in 14 years was less than ideal. Under normal circumstances, I would have been attentively following the Chancellor’s announcements on changes to the tax regime—especially this year, given the intense speculation in the lead-up to Budget Day. Instead, however, my mind was preoccupied with a different kind of uncertainty: navigating the relentless roller coasters my family insisted we tackle back-to-back.

Upon returning to the safety of my desk and delving into the details of the Budget, it was encouraging to note the Chancellor’s specific recognition of the Enterprise Investment Scheme (EIS) as a key component of the government’s commitment to fostering investment and economic growth, with the Chancellor stating, “As a sign of this government’s commitment to supporting growth and entrepreneurship, we have already extended the Enterprise Investment Scheme and the Venture Capital Trust schemes to 2035, and we will continue to work with leading entrepreneurs and venture capital firms to ensure that our policies support a positive environment for entrepreneurship in the UK.”

The previous government applied to the EU for the extension of the EIS and VCT income tax relief for a further 10 years. During the summer it was confirmed that the EU had no objection to this extension, and in early September the requisite Treasury Order was laid in Parliament confirming that the new sunset date for these tax reliefs is 5 April 2035.

Given the recent EU approval, it came as no surprise that there were no changes to the venture capital tax reliefs in the Budget Statement.

1             Capital Gains Tax

The Chancellor announced an increase in CGT effective from 30 October 2024 on standard assets, which includes sales of shares (excluding EIS qualifying shares) to bring the lower rate up from 10% to 18% and the higher rate up from 20% to 24%.

What does this mean for EIS investing?

EIS qualifying shares are exempt from the change, and providing the EIS conditions have been met, any gain on the disposal of shares which have been held for three years are free of tax, provided income tax relief was obtained on the full amount invested.

Capital Gains Tax Deferral

All, or indeed some of the gains resulting from the sale of assets can be deferred through an investment into EIS-qualifying companies using EIS reinvestment relief (also called deferral relief). To qualify for this relief, the investor must be a UK Resident at the time the gain was made and at the time of the reinvestment. If the investor becomes non-UK resident within 3 years of the issue of the new shares, this is a chargeable event which will bring the deferred gain back in to charge. The exception to this is if the investor goes abroad on a full-time employment contract and returns to the UK within 3 years.

All or part of a capital gain can be deferred, even if the CGT has already been paid, and any CGT paid can then be reclaimed from HMRC, providing a cash flow benefit to the investor until such time as the investments crystalise and the CGT becomes payable, unless the gains are once again reinvested and deferred.

There is a specific time window in which the investor must subscribe for their EIS shares. The reinvestment must be made within 12 months before or 36 months after the disposal of the original asset. There is no ceiling to the amount of the gain that can be deferred – the £1,000,000 subscription limit (£2,000,000 for Knowledge-Intensive companies) only applies for Income Tax purposes.

The deferred gain will come back into the charge of CGT in the year the newly acquired EIS qualifying shares are disposed of, and not when the original disposal took place, and will be subject to tax at the rate of CGT applicable at the time the newly acquired EIS qualifying shares are disposed of.

Some investors may have deferred gains previously through EIS investments, which are crystalising in the coming months and years as exits are achieved, and the CGT rate may be at a higher rate of tax than when the gain was originally made.

When the deferred gain comes back in to charge, there remains the opportunity for those investors to consider whether to reinvest into a further EIS investment opportunity to attract a further deferral period and claim further income tax relief on investment.

For investors realising gains from 30 October 2024 and who consider the new CGT rates unpalatable, they may consider making an EIS investment and deferring some or all of the gain made.

2             Inheritance Tax

Inheritance Tax is always a topic which attracts significant attention ahead of Budgets, and this Budget was no different.

An investment in an EIS-qualifying company should benefit from 100% Business Relief (BR) and be exempt from Inheritance Tax (IHT), provided the investment has been held for two years at the time of death, and this remains the case until 5 April 2026.

From 6 April 2026, the Chancellor announced that the government will reform BR with unlisted shares such as EIS shares remaining free from IHT up to £1m, with assets over that threshold being charge at an effective IHT rate of 20%.

Also from 6 April 2026, shares listed on the Alternative Investment Market (AIM), and other junior markets which are not designated as “recognised stock exchanges”, will only obtain BR at 50%, rather than the current 100%.

Inheritance tax – Replacement property relief

Whilst this is not an EIS relief, it is worthy of a mention as it can play an important part in estate planning when investing in EIS shares and remains unchanged following the Budget.

There is a three-year window, during which some or all of the proceeds resulting from the sale of BR qualifying shares can be invested back into BR qualifying assets, such as EIS shares. If such action is taken, the newly acquired qualifying assets will qualify for BR and should be immediately exempt from IHT until 5 April 2026, with the new thresholds noted above applying from 6 April 2026.

Therefore, you do not need to wait the two years it would normally take for a potential BR qualifying investment to qualify for BR.

The conditions are such that, at the point of death, the estate must have owned Relevant Business Property for at least two out of the last five years. Another condition is that you must reinvest the entire proceeds of any sale in qualifying assets.

What does this mean for EIS investing?

An investment in an EIS-qualifying company should benefit from 100% BR and not be chargeable to IHT, provided the investment has been held for two years at the time of death, and this remains the case until 5 April 2026.

From 6 April 2026, BR qualifying investments such as EIS shares will remain free from IHT up to £1m, and assets over that threshold will have IHT charged at an effective rate of 20%, and so EIS qualifying investments remain an effective vehicle for IHT planning.

Summary

Against a high tax backdrop, and with the recent extension of the scheme for a further ten years to April 2035, the EIS remains a stable and reliable source of tax relief to help mitigate the risk of investing in SME’s.

The increase in CGT rates will likely have the effect of increasing the appeal of EIS investments for investors that have already deferred gains previously, where those gains are crystallising into a higher tax regime, and for investors realising new gains against a less palatable rate of CGT.

With BR relief on AIM shares halving from 6 April 2026, investors may swing EIS allocations towards unlisted shares that continue to qualify for 100% BR relief until 6 April 2026. From 6 April 2026, 100% BR relief on unlisted shares will remain available on the first £1m of assets and 50% BR relief thereafter.

Glen Stewart, Head of Business Development, Committed Capital

4th November 2024