What to consider as the new tax year approaches

The power of VCT and EIS investing

Venture Capital Trusts (VCT) and Enterprise Investment schemes (EIS) are both aimed at encouraging investment into small, unquoted, UK trading companies. In order to promote investment in this crucial area of the economy, the government offers generous tax benefits to investors.

Investors can claim income tax relief equal to 30% of their investment up to £2 million for qualifying EIS and £200,000 for VCTs. This means that for every £100,000 invested, investors can receive £30,000 back in the form of tax relief. There are also a number of other associated tax benefits. VCT and EIS investments are higher risk and are only suitable for UK resident taxpayers who can tolerate higher risk and have a suitable timeframe for investment.

“With ultra-high-net-worth (UHNW) investors increasing their allocation to private markets, the EIS and VCT tax wrappers remain a useful access point to the venture asset class. Diversification is key in this high-risk area and investors should still go into these investments willing to accept a total capital loss. One way to diversify is to build exposure over a number of tax years or “vintages” and work with investment providers who scrutinise a venture managers capability to pick sensible companies over the long-term”.

Avoiding becoming “long term resident”

From 6 April 2025 a new residence-based regime will apply to determine UK inheritance tax exposure. Those who have been resident for 10 or more out of the 20 previous tax years will be deemed “long term resident” and subject to UK IHT on their worldwide assets for as long as they remain UK tax resident and for a number of years even after ceasing to be a UK tax resident – the so called IHT “tail.”

“For internationally mobile, UHNW clients this aspect of the non-dom regime changes will be particularly hard felt, but for many there may be a simple solution in the form of life insurance designed to cover one’s IHT exposure only until such time as they are no longer UK long-term resident. The cost can be less than 1% of the total potential IHT bill and a correctly structured policy will ensure the full value of the estate can pass intact to the intended beneficiaries.”

Restructuring foreign income and gains

The remittance basis of taxation will be replaced by a new Foreign Income and Gains (FIG) regime. The FIG regime will be available to UK tax residents who have been non-UK tax resident for at least 10 consecutive years before becoming UK tax resident and available for up to four years, during which foreign income and gains are tax-free even if brought into/used in the UK. Current remittance basis users who have already been tax resident for four years will no longer be able to shelter offshore income and gains arising post 6 April 2025 from tax.

“There is an increasingly narrow window for current remittance basis users moving to the new regime, to rebase the value of overseas assets prior to 6 April 2025. This would give them a lower base if selling assets under the new regime. There are other temporary repatriation or structuring opportunities, however it is imperative that specific tax advice be sought, and we would expect these conversations to already be well underway with clients’ tax advisers.”

Disclaimers

The value of investments can fall and you may get back less than you invested. This does not constitute tax or legal advice. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Neither simulated nor actual past performance are reliable indicators of future performance. Information is provided only as an example and is not a recommendation to pursue a particular strategy. Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness. Forecasts are not a reliable indicator of future performance.

Nick Ritchie, senior director and wealth planner at RBC Wealth Management.