Yesterday’s budget was not a blockbuster budget, but this was probably to be expected given the current political and economic context. Beneath the usual media headlines, there were a few points worth noting for investors seeking tax-efficient investment solutions. Not to mention those who read my post yesterday!
1 Pensions – we thought that the Chancellor was going to fiddle with annual contributions, but he did not, perhaps because he has restricted private sector investments for some time and perhaps because he reserves this option for future budgets. Instead of reducing annual contributions from £40,000 to somewhere near £30,000 as we thought, he increased the Lifetime Allowance slightly to £1,055,000. Who would have thought?
In yesterday’s post, I commented expectations that he would have raised revenue on the pension front, but instead he made at least some commitment to our second speculation (on the Pension front) which involved encouraging institutional investment into early-stage VC investing. There was Treasury acknowledgement that it is keen to encourage institutional investment into Patient Capital and they have made it clear that there is future potential for DC pension investing in patient capital as part of diversified portfolio. To facilitate this investment, HM Treasury has announced a series of measures to remove barriers and support pension funds in accessing this asset class. Find out more here - Financing growth in innovative firms: one-year on
2 IHT Review – there seems to be little to report on currently but watch out for a bombshell one of these days.
3 Entrepreneurs' relief – we discussed this yesterday and there was a bit of movement, but only to move the minimum ownership period from one-year to two-years.
4 Capital Gains Tax – everyone’s favourite whipping boy! Nothing to report except for the new restrictions on CGT relief on principal private residences.
5 EIS Income Tax Relief – There was some talk about moving the 30% income tax relief to 20%, but we always thought that made no sense given the comprehensive review that was the Patient Capital Review of 2017. This development has unsurprisingly not transpired.
However, there was also a consultation that the Treasury conducted with EIS participants about a new EIS fund structure during 2018. It has been described as a Knowledge Intensive Fund. HMRC announced that a new approved fund structure will go ahead as described by EISA:
“In light of the responses to the consultation, the government has decided to take forward its proposals to introduce a new approved EIS fund structure, improving on the existing structure through:
focusing on knowledge-intensive – a minimum of 80% of funds raised must be invested in KICs, reducing the risk of inadvertent non-compliant investment threatening approved fund status
flexibility for managers – funds will have two years to deploy capital, with at least 50% of each raise to be invested within the first 12 months, with monies not yet invested held in cash. This improves on previous rules where 90% of each raise had to be deployed within the first 12 months
clearer timings for tax relief – investors to be allowed to set their relief against income tax liabilities in the year before the fund closes, where previously this was only permitted in the same year the fund closes
Moreover, HMRC has digitalised the certificates and paperwork associated with this investment. This has eliminated the need for signed paper documents and subsequently reduced administrative burden for all parties involved.
The conclusion would appear to be that, although we did not expect the budget to provide much for tax-efficient investors, there seems to be much to like and a structural Treasury bias towards fund managers who invest in early-stage disruptive technology companies.