Wealthy investors are set to pour money into the Seed Enterprise Investment Scheme (SEIS) due to a squeeze on pension savings.
Other business investments with tax incentives are also on their radar, says research by investment service Wealth Club.
The main driver is Chancellor George Osborne’s perceived attack on pension saving for taxpayers earning more than £150,000.
They lose £1 of their annual allowance for every £2 they earn over £150,000 a year up to a maximum of £30,000 for those earning £210,000 a year.
In effect, this reduces their annual allowance of £40,000 a year down to £10,000.
Cash exodus from pensions
The annual allowance is the maximum a retirement saver can contribute to a pension each year.
The size of pension pots is also restricted to £1 million by the lifetime allowance – which has dropped from £1.8 million over a number of years.
The Wealth Club study claims that this restriction on pensions is leading high earners to look at other tax effective investment options – with SEIS, the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCT) high on their list of targets.
The survey disclosed 70% of high earners want to invest in SEIS, EIS or VCTs.
Half of high earners said they have stopped contributing to pensions as a result of the annual allowance and lifetime allowance cuts.
Of these, two thirds will invest in SEIS, EIS or VCTs instead and 38% had not invested in start-up or growth businesses before.
Tax incentives on investments
“No wonder these tax incentives look attractive to high earning investors,” said Wealth Club investment director Ben Yearsley.
“Anyone investing the maximum of £1.3 million across all three this year could expect an income tax rebate of £410,000, while the might only look forward to tax relief of £4,500 on a pension contribution of £5,500.”
SEIS offers income tax relief of 50% on a maximum annual investment of £100,000. SEIS also comes with share growth free of capital gains tax.
EIS has similar tax breaks to SEIS, but at a rate of 30% on investments up to £1 million.
VCTs have a different structure for tax relief, but still offer extensive tax breaks.