Wealthy investors flock to start-ups for tax breaks amid looming capital gains tax raid

Wealthy investors are increasingly turning to startups to ease their tax burdens, especially with a potential capital gains tax hike looming in the next Budget.

Investment in SEISs rose 250% between July 4 and September 16 this year, according to Wealth Club, as savers hope to reduce their CGT liabilities by up to 50%.

The surge in SEIS investment coincides with government efforts to stimulate economic growth by encouraging investment in small British businesses. SEIS schemes allow investors to deposit up to £200,000 a year in early-stage companies, providing significant tax benefits, including 50% income tax relief and relief from CGT on any gains made from the investment. Importantly, it also offers a 50% relief on CGT from the sale of other assets, such as buy-to-let properties, when reinvested in eligible SEIS companies.

With CGT reform expected in the Budget, investors are seizing the opportunity to take advantage of extended SEIS tax breaks, which were recently extended until 2035. Higher rate taxpayers who reinvest a £100,000 gain into a SEIS fund could cut their CGT bill from £24,000. £12,000 to £12,000, with £50,000 also secured as income tax relief.

Nicholas Hyett of Wealth Club points out that high-net-worth individuals are increasingly using social income information systems to protect their future earnings from tax, given the potential for changes to CGT, inheritance tax and pensions. “It is not surprising that wealthy investors would benefit from schemes that provide upfront tax relief while protecting future gains,” says Hyett.

However, SEIS investments carry significant risks. While the tax benefits are designed to compensate for the higher risks of supporting startups, investors should be aware that about half of SEIS companies fail within five years. However, successful startups such as Swytch Bike, snack company Olly’s, and nutritional supplement maker Hunter & Gather highlight the potential rewards.

In contrast, enterprise investment schemes (EISs) and venture capital funds (VCTs) offer less generous tax breaks, although they are still popular with wealthier investors. EISs allow annual investments of up to £1 million with 30% income tax relief and deferred CIT, while VCTs provide tax-free dividends and CIT relief, with investments managed through a fund to help spread risk.

Experts advise that these schemes are not intended for the risk-averse, and should form only a small part of a broader, more spread-out investment portfolio. Jason Hollands, of Evelyn Partners, warns that while the minimum tax-free holding periods are three years, exiting these private companies depends on finding a buyer, which is not guaranteed.

Despite the potential for high rewards, investors are also urged to consider the high fees associated with SEIS funds. Fees can include an initial 2.5% fee, as well as management and performance fees that may accumulate over time. Investors need to carefully weigh risks and rewards before diving into these high-risk niche schemes, as tax benefits alone should not drive decision-making.