4 Budget Changes That Could Impact Investors in 2023

With the UK grappling with its largest annual budget deficit in 75 years, many investors are watching closely to see how Chancellor Rishi Sunak plans to address the government’s £266 billion overspend. The upcoming Autumn Budget is expected to introduce significant changes, which could affect investors in a variety of ways. As speculation grows, here are four potential changes that could shape the landscape for investors, and how they might prepare for them.

1. Capital Gains Tax (CGT) Increase

One of the most discussed changes leading up to the Autumn Budget is the potential hike in capital gains tax. Over recent weeks, many have speculated that CGT could be an easy target for raising revenue. Last year, CGT contributed £10.6 billion to HM Revenue and Customs, which is a significant increase from the £2.6 billion collected a decade ago.

This hike would primarily affect those with assets exceeding the £12,300 tax-free threshold, as CGT is charged on the gains from the sale of these assets. With the highest earners paying a substantial portion of CGT—41% of the total in 2020/21—it’s likely that the Chancellor will look to increase this tax as part of efforts to reduce the deficit. Aligning CGT rates with income tax rates, as suggested by the Office of Tax Simplification, could add an additional £14 billion per year to government coffers.

For high-net-worth individuals and experienced investors, this could lead to significant losses on capital gains. To mitigate this, tax-efficient investment schemes, such as the Enterprise Investment Scheme (EIS), could become more attractive, offering full CGT relief if shares are held for at least two years. As investors brace for potential tax hikes, strategies that protect capital from CGT will likely see increased interest.

2. Potential Simplification of Inheritance Tax Rules

While it’s unlikely that the Chancellor will raise the inheritance tax (IHT) rate, which currently stands at 40%, there is speculation that the government may seek to simplify the rules. IHT planning has traditionally allowed individuals to reduce their liability through various reliefs, such as annual exemptions and gifting surplus income. However, these reliefs could come under scrutiny in the Autumn Budget, with some predicting that the government might consolidate them into a single, less generous exemption.

For investors with estates above the £325,000 nil-rate band, changes to IHT relief could make it harder to pass on wealth without incurring a significant tax bill. As IHT becomes a growing concern for more individuals, looking into tax-efficient investments that qualify for IHT relief, such as EIS and SEIS, could provide a way to shield assets from hefty taxes. These investments not only offer IHT relief but also support the growth of small and medium-sized enterprises (SMEs), adding an element of positive social impact to financial planning.

3. Corporate Tax Hike and Bank Surcharge Reduction

In the upcoming Budget, one of the more significant changes will be the rise in corporation tax, from 19% to 25% starting in April 2023. This was previously announced in the Spring Budget. However, the Chancellor is also expected to reduce the additional surcharge that banks currently face, from 8% to 3%. This reduction will bring the total corporation tax rate for banks to 28%, down from 33%, as part of efforts to make the UK’s financial services sector more competitive.

While this move is designed to help UK banks remain globally competitive, it may come under public scrutiny due to the perception of easing tax burdens on financial institutions during a time of economic strain. From an investor’s perspective, the reduction in the bank surcharge could further highlight the financial sector as a key area of growth and investment. The UK’s thriving fintech industry, which saw record venture capital investments, could be a primary beneficiary, making it an attractive sector for investors looking to capitalize on innovation and high returns.

4. Startup Investment Incentives Could Remain a Priority

The Chancellor has previously emphasized the importance of fostering innovation and supporting high-growth startups. With the UK’s thriving venture capital market, the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) have played a pivotal role in attracting investment into early-stage businesses. The EIS Association (EISA) has called for the government to prioritize these schemes in the Autumn Budget, especially in light of the £768 million funding gap for seed investments.

The EIS and SEIS have raised over £25 billion since their inception and continue to be key drivers of economic growth. These schemes not only offer significant tax reliefs, such as income tax and capital gains tax exemptions, but also provide an opportunity for investors to support transformative companies. As the Chancellor considers future investment incentives, the EIS and SEIS may remain essential tools for investors looking to maximize returns while supporting innovation.

Preparing for the Budget and Beyond

With the potential for significant tax changes in the upcoming Budget, investors must be proactive in preparing for the possible impact on their portfolios. From increased capital gains tax and changes to inheritance tax relief to shifts in corporate tax rates and support for startups, the government’s focus on reducing the deficit could have far-reaching consequences for investors.

For those looking to minimize tax liabilities, tax-efficient investment options such as the EIS, SEIS, and other growth-focused strategies will become even more crucial. By staying informed and exploring these opportunities, investors can better navigate the changing tax landscape and ensure their investments remain resilient in the face of economic challenges.