At first glance, last week’s Budget didn’t hold big changes for the tax-advantaged or estate planning spaces. The huge speculation generated in the press about the potential abolition of inheritance tax (IHT) and its attendant reliefs, such as Business Relief, fell on deaf ears as brand new chancellor Rishi Sunak directed his influence elsewhere.
That said, a number of his announcements, particularly in relation to small and medium sized companies (SMEs) whether coronavirus related or not, business support and innovation, are of significant interest to investment managers and advisers looking for efficient tax planning and wealth transfer options via investment routes.
Good signs for EIS
The new EIS knowledge-intensive company (KIC) approved fund structure will finally be introduced in the next financial year, with the likely result that the popularity of KICs will continue to grow. But other changes are also likely to support these types of firms and put them in a better position to receive both EIS and VCT funding:
The Budget sets out plans to increase public R&D investment to £22 billion per year by 2024-25. That takes direct support for R&D to 0.8% of GDP and places the UK among the top quarter of OECD nations – ahead of the USA, Japan, France and China. The Budget’s supporting documents state that, “Achieving the government’s ambitions on R&D will require investment from the private sector.”
The provision of additional funds to the British Film Commission, could be a filip for the media and entertainment sector in EIS and VCT which has shrunk considerably since the introduction of the risk to capital condition two years ago. The British Film Commission will act as a single source of expert advice for investors and developers and provide targeted support at the early stages of viable projects to facilitate increased provision of studio facilities across the UK.
There is also good news for UK universities, with the government providing an immediate funding boost of up to £400 million in 2020-21 for world-leading research, infrastructure and equipment. The intention is to, “help build excellence in research institutes and universities right across the UK, particularly in basic research and physical sciences.” The potential knock-on effect is for a greater number of university spin outs, which have been a lucrative area for some EIS and VCT funding.
Then there are the new commitments to environmental issues. Sunak’s Budget noted that, “Increasing the UK’s use of clean energy is a vital part of reducing carbon emissions and putting the nation at the forefront of new innovative industries.” Could that mean sustainable energy generation might come back into the scope of EIS and VCT investments in future?
Benefits for Business Relief
Meanwhile, could some of the Budget items drive the type of green investments available and already eligible for Business Relief? For example, in relation to the Green Gas Levy, “the government will consult on introducing levy-funded support for biomethane production to increase the proportion of green gas in the grid.” AND “The Renewable Heat Incentive (RHI) – The government will extend the Domestic RHI in Great Britain until 31 March 2022… helping to provide investment certainty for the larger and more cost-effective renewable heat projects.”
What’s more, the government reiterated its support of mechanisms through which growth can be generated, stating: “The government places a high priority on expanding the supply of finance through the cycle to support long-term investment to increase the productive capacity of the economy, across all regions and nations of the UK. This includes, but is not limited to, areas such as infrastructure, SME finance, venture and growth capital.”
On this basis, as one of the world’s leading growth markets, AIM looks set for continuing political backing and while the Budget announced strong measures to help the types of growth companies that list on AIM, given the coronavirus predictions – there may well be opportunities for individual investors to do their bit and perhaps benefit later from a spot of value investing: Companies without up to 20% of their workforce and interrupted access to supplies as well as reduced consumer spending, could be looking for follow-on funding rounds sooner and higher investment levels.
The high proportion of Business Relief-qualifying companies quoted on AIM could be looking to make use of the market to secure follow-on funding rounds sooner than otherwise, with higher investment levels at least temporarily, even with the government assistance on offer. For unquoted EIS and VCT investee companies, additional fundraisings could also be required and the possibility of delayed exits should be considered.
The cut in entrepreneur’s relief lifetime limit from £10 million to £1 million will give business owners less headroom when selling or liquidating their business in terms of capital gains tax. Depending on investors’ circumstances and the type of Business Relief investment, entrepreneurs relief can be accessed at the same time, although not all Business Relief structures attract entrepreneurs relief. Entrepreneurs relief enables company founders selling their businesses to pay capital gains tax at a rate of 10% as opposed to the typical 20% that usually applies to gains.
Tax planning pressures
The announcement of further resources being made available to HMRC to tackle tax avoidance, evasion and other forms of non-compliance looks to be another blow to the abusive tax avoidance schemes and those who promote them that have been targeted for the last few years. The government-backed status of the Enterprise Investment Scheme, Venture Capital Trusts and Business Relief is likely to provide even more comfort to those searching for legitimate tax planning methods.
Bearing in mind the spring consultation announced in the Budget to “seek evidence about providers of tax advice, current standards upheld by tax advisers, and the effectiveness of the government’s efforts to support those standards, in order to give taxpayers more assurance that the advice they are receiving is reliable”, the safe haven these schemes provide may become even more important.
Building future wealth
The Budget also marked more recognition from the government of the need to encourage savings at a time of low interest rates and intergenerational differences, with more recent generations at a significant disadvantage: “By saving towards their future, families can give children a significant financial asset when they reach adulthood – helping them into further education, training, or work. Junior ISAs (JISAs) and Child Trust Funds (CTFs) are tax-advantaged accounts for children, designed to encourage a long-term savings habit.” As a result, the amount families can save into a JISA or CTF is to be more than doubled in 2020-21, increasing from £4,368 to £9,000.
For wealth planners, this is a good sign: The goal of getting people saving at a young age and engaging with their money is more likely to lead to new generations of clients who realise they need and want to take financial advice when they have funds to plan with.
The upshot is that Sunak’s speech yielded very few direct changes to EIS, VCT and Business Relief. But the likely indirect impacts to these schemes could be far-reaching and largely positive.