The Seed Enterprise Investment Scheme (SEIS) is becoming a refuge for investors who cannot take advantage of pension tax breaks, according to a new study.
Hundreds of millions of pounds have poured into SEIS and the Enterprise Investment Scheme (EIS) since Chancellor George Osborne upped the tax ante with market leading income and capital gains tax reliefs on investing directly in companies.
Osborne’s tax tweaks two years ago introduced SEIS for start-up firms and increased the tax relief on EIS.
Since then, investors have ploughed money into both, according to a study by EIS and VCT fund manager Calculus Capital.
Writing for specialist investment web site SEIS.co.uk, reports HM Revenue & Customs says EIS investments doubled from almost £550 million to more than £1 billion following the Chancellor’s revamp of the scheme.
Diverted funds
“Since the tax change, we have seen a growing preference from investors for EIS over VCTs,” said Calculus Capital chairman Susan McDonald.
“We’ve looked at the figures and this seems to be a strengthening trend that was certainly helped by the Chancellor’s decision to increase the amount of income tax relief.”
McDonald’s view is that the extra cash going into SEIS and EIS is not new investment but money diverted from other sources to take advantage of the generous tax breaks offered by the two schemes.
“VCT investment has been fairly level over the past five years,” she said. “To me, this means that investors are not deciding to put their funds into EIS instead of VCT, but extra money is being raised from other sources,” she said.
SEIS tax breaks
“My bet is much of the money would have previously gone into pensions.”
The main reason for this change of fortune is this tax year’s fall in the annual pension contribution limit to £40,000 and the lifetime allowance limit dropping to £1.25 million.
“We have seen financial advisors suggesting EIS and SEIS as supplementary pensions as the funds can take advantage of tax reliefs that arguably the most tax-efficient investment vehicle available to UK investors,” said McDonald.
“Everyone is recognising the potential for growth EIS and SEIS offer as an increasing number of personal pension restrictions lead investors to look for an alternative home for their money.”