In November 2022, the Chancellor delivered what was in effect a Budget in all but name in which he cut spending and raised taxes in an attempt to reassure investors about the UK’s commitment to financial stability. Given that Government typically announces significant policy changes in the autumn and lesser changes in the spring we are left wondering what Mr. Hunt will do on 15 March 2023 when he delivers his promised “full fat” budget and OBR Forecast. Whilst we can’t be certain what the Chancellor will do, we do not expect major changes to the following reliefs and incentives.
Seed Enterprise Investment Scheme (SEIS)
SEIS is a small-scale venture capital scheme designed to help start-up companies obtain initial investment. Amendments to expand the scheme were announced in the “mini budget” on 23 September 2022 and were one of the few announcements to escape the Government U-turn later in the year.
The new changes come into effect from April 2023 and provide for the following:
- – The maximum amount a company can raise is increased from £150,000 to £250,000
- – The gross asset limit will increase from £200,000 to £350,000
- – The age of the new qualifying trade will increase from 2 to 3 years and
- – The annual investor limit will double to £200,000.
For the investor with a stake of less than 30% in a qualifying company, SEIS can provide income tax relief of 50% of the amount invested up to a maximum relief of £100,000. The relief can be claimed in the year of investment, or any unused annual relief can be carried back to the previous tax year. In addition, any gain arising on the disposal of shares on which the investor received SEIS income tax relief (which has not been withdrawn) is not a chargeable gain, where the disposal takes place more than three years after issue.
Enterprise investment Scheme (EIS)
The tax incentives offered for EIS investments are intended to encourage investment in small, young high-risk companies which have limited access to market finance. There are stringent conditions attached to both the EIS issuing company and investor in order to obtain the relief. Originally EIS was subject to a sunset clause whereby the relief was to be no longer available for subscriptions made on or after 6 April 2025. The scheme has now been extended beyond 2025.
An investor subscribing for new shares in a qualifying EIS company can benefit from a number of reliefs including income tax relief up to 30% of the permitted maximum subscription, capital gains tax exemption, loss relief against capital gains or income tax and the ability to defer capital gains. In addition, Inheritance Tax Business Property Relief may also be available.
The permitted maximum investment in a qualifying company is £1m (or £2m where the investment is in a “knowledge intensive” company). However, the tax relief attaching to the investment can reduce a tax liability to nil but cannot generate a tax repayment so care needs to be taken not to invest more than the relief that can be claimed in the current or prior year.
Enterprise Management Incentive Scheme (EMI)
The need to attract and retain quality staff has always been important for employers but even more so in a competitive market where there is a skills shortage in the labour force.
EMI, which is tax advantaged share option scheme, is a selective share scheme allowing companies to target rewards to particular employees in order to drive performance and reward loyalty. With many businesses suffering from cash flow problems against a tide of rising inflation, offering non cash incentives to key employees may make leaving an employment a bigger decision than might otherwise be the case with a salary-only package. Employee share schemes can be used to create long term incentives typically aimed to crystallise on a sale or listing of the company, or alternatively as a reward for completion of a number of years’ service.
Share options allow employees to acquire shares at a fixed date in the future or following a predetermined event. The price they will pay for their shares is determined at the start of the process and employees have nothing to pay until they exercise the option and acquire the shares. No income tax or NIC is payable when the option is granted. Similarly, the exercise of the option should not give rise to an income tax/NIC charge (provided the various conditions of the scheme are met). Companies may also be able to claim a corporation tax deduction for the difference between the market value of the shares when the options are exercised, and the amount paid by the employee to acquire them.
The employees will be subject to capital gains tax when they sell the shares they acquire via the option but shares acquired via an EMI scheme may also qualify for Business Asset Disposal Relief resulting in a 10% capital gains tax rate on the first £1m of gains. This makes an EMI reward far more attractive from a tax perspective than a cash bonus on a sale of the company which would result in a tax charge of up to 47%.
Business Asset Disposal Relief (BADR)
BADR remains an important valuable tax relief – even after the reduction of the lifetime limit from £10m to £1m in March 2020. Originally called “Entrepreneurs Relief” it can be available on the disposal of a “business” such as a trading company, a sole trade business, share of a trading partnership or assets used by a trading company or partnership.
For shares in a trading company, the shareholder must hold at least 5% of the company’s ordinary share capital, voting rights, rights to dividends and assets on winding up at least 2 years prior to the sale as well as being an officer or employee of the company for an uninterrupted period of 2 years back from the date of sale.
Where the relief is available up to £1m of capital gains will be subject to tax at 10%.
Inheritance Tax (IHT) and wealth management
IHT, sometimes referred to as the “death tax”, is charged at 40% on the excess value of a person’s worldwide non-exempt assets or “estate” (after deducting funeral expenses and debts) over the IHT threshold. As the threshold or the nil rate band has been frozen at £325,000 since 2009 and will be kept at that level until at least 2026, more people than ever may find themselves unexpectedly caught by this tax.
There are some steps that can be taken to help minimise any IHT exposure although generally IHT planning should take place earlier rather than later due to the 7-year cumulative clock on lifetime gifts that runs back from the date of death.
There are exemptions for IHT transfers between spouses i.e., those who are legally married to each other, those who are legally registered as civil partners and those who are legally married although separated at death. Individuals who are cohabiting are not considered spouses for IHT purposes.
Business Property Relief (BPR) is a very valuable IHT relief and usually applies to shares in trading companies. However, if the shares in a trading company are sold, BPR relief is lost, and the resultant sales proceeds could be exposed to IHT. Careful pre-sale planning can help mitigate future IHT risks.
If you would like to discuss any of the above matters (or any other tax related issues) in more detail, please contact any member of our Tax team.