Potential Changes to Capital Gains Tax After the Labour Budget Announcement (Oct 24): Implications for Enterprise Investment Schemes

As the UK approaches the October 2024 Budget announcement, discussions surrounding potential changes to Capital Gains Tax (CGT) are intensifying. Labour’s fiscal strategy will likely reflect the ongoing economic challenges, including inflation, public spending pressures, and efforts to stimulate growth.  

What might this mean for the Enterprise Investment Scheme (EIS)? Let’s explore any potential increase to CGT rates, the implications for EIS, and what this means for investors and startups alike. 

Current Landscape of Capital Gains Tax 

In the UK, CGT is applied to the profit made from selling assets, including stocks, real estate, and businesses. The current structure includes different rates depending on the gain sold, with full information detailed here. 

Potential Changes to Capital Gains Tax 

Speculation around the October 2024 Budget continues to suggest that the Government may consider adjusting CGT rates or the thresholds at which they apply. Possible changes could include increased CGT rates or revisions to annual allowances, which the previous Government already reduced to £3,000 in 23/24. 

Implications for EIS investing 

In the event Capital Gains Tax is increased following the Budget Announcement, there are several potential outcomes that could enhance the attractiveness and effectiveness of EIS in the long run. Here are some examples: 

Enhanced Demand for Tax Relief 

With an increase in CGT rates, investors may seek more tax-efficient investment avenues to mitigate their overall tax liability.

EIS offers significant tax reliefs, including: 

• Capital Gains Tax deferral: applied to gains crystallised within the last 3 years or gains due within the next 12 months. Investors facing potentially higher CGT bills post-budget announcement will need to consider EIS as the only tax-efficient product to provide this type of relief.  
• Income Tax Relief: Investors can claim up to 30% income tax relief on the amount invested, which becomes increasingly attractive if CGT rates rise. 
• Tax Free Growth: If investors realise gains from EIS investments, they are exempt from CGT if they hold the investment for a minimum period. Higher CGT rates could make this exemption more appealing. 

Seed EIS (early-stage companies) offers more significant potential tax reliefs, including: 

• Capital Gains Tax exemption: on 50% of the investment, applied to gains crystallised within the last 3 years or gains due within the next 12 months. This form of relief may drive significant investment in Seed EIS should CGT increase in the Budget, so it is an important consideration for advisers. 

• Income Tax Relief: Investors can claim up to 50% income tax relief on the amount invested. 

1. Greater Focus on High-Risk Investments 

Higher CGT rates may encourage investors to look for opportunities to offset their tax liabilities through investments in high-risk ventures. S/EIS is specifically designed to support high-risk startups and SMEs, making it a viable option for those looking to invest in sectors with growth potential while also benefiting from tax advantages. 

2. Increased Investor Demand 

An increase in CGT could lead to heightened awareness about the importance of tax planning. This may result in more client queries about planning opportunities, and specifically EIS. Advisers will need to have the awareness, knowledge and expertise to educate clients about S/EIS as potentiality strategic investment vehicles. As more investors become informed about the benefits of S/EIS, the demand for these schemes will likely increase. We’ve already seen non-advised client demand for Seed EIS reported, with Wealthclub reporting an 188% increase in investments (in comparison to the same period last year) between the election on July 4th and the end of August 2024.*  

It is, therefore, important for financial advisers to take a leading position in discussing S/EIS ahead of clients exploring this as an option themselves. 

3. Longer Investment Horizons 

The prospect of higher CGT might encourage investors to adopt a longer-term investment horizon. Since EIS offers tax reliefs that are contingent on holding investments for a specified period, investors may be more inclined to commit capital to EIS-eligible companies, fostering stability and growth in the startup ecosystem. 

4. Continued Government Support for EIS 

Prior to the General Election, both main political parties emphasised the importance of EIS and SEIS to achieving economic growth. This was exemplified by the new Government ‘rubber stamping’ the extension of EIS to 2035. 

5. Supporting the Government’s Growth Agenda 

The Enterprise Investment Scheme (EIS) has consistently received cross-party support for the past three decades. Since its inception, various governments from different political backgrounds have acknowledged the scheme's value and have actively advocated for its continuation. Recently, there has been encouraging news with the new Labour government announcing a 10-year extension of the EIS, extending it until April 2035. Treasury Minister James Murray MP stated, "Startups and entrepreneurs are a driving force for greater investment, more jobs, and economic growth in the UK. By extending these schemes for 10 years, we are providing the stability and support they need to help us make every part of Britain better off."** 
 
The significance of the EIS cannot be overstated. It not only offers vital support to tens of thousands of ambitious entrepreneurs but also plays a crucial role in fostering innovation, creating jobs, and driving economic growth. A recent report from Beauhurst revealed that EIS-backed companies generated 400,000 jobs across the UK in 2023 alone.*** Additionally, the Treasury's own research underscores the EIS's effectiveness in bridging the early-stage investment gap over the past 30 years, highlighting that the tax reliefs integral to the EIS are fundamental to its success. 

A Final Point

While an increase in Capital Gains Tax may present challenges for investors, it could also create planning opportunities, with Enterprise Investment Scheme being of great significance. By encouraging investors to seek tax-efficient strategies, fostering a focus on long-term planning, and keeping such planning with an adviser environment, financial advisers have significant opportunities to ease any CGT concerns. 

As always, investors should remain informed and proactive in adapting to changing tax policies to maximise their investment strategies. 

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Olivia Drinnan, Marketing Director at Deepbridge Capital.  

*SEIS flows jump 188% since Election Result - IFA Magazine 

**Not many tax rules deserve a birthday party - but the EIS is an exception - CityAM 

****The Full List of UK Unicorn Companies | Updated 2024 (beauhurst.com)