Tax Advice | Allen & Atherton

Diversify Your Investment Portfolio To Shield Against Soaring UK Inflation

Diversify Your Investment Portfolio To Shield Against Soaring UK Inflation

UK annual inflation rose to 9.4 percent in June 2022, the highest level for more than forty years. A combination of unprecedented monetary stimulus during the COVID-19 lockdowns combined with global supply chain disruptions is pushing the pound’s value down versus goods and services in a way not seen for over a generation.

Because of this, investors are concerned, particularly those with money tied up in cash, equities and housing. The economy is currently going through a rebalancing where the value of assets is falling and the value of goods is rising. Currently, it is not clear how or when this process will end.

Fortunately, there are methods you can use to shield yourself against inflation that could maintain or increase the value of your portfolio during this challenging time.  

At Allen & Atherton, we suggest that investors leverage the following:

  1. Enterprise Investment Schemes (EIS)
  2. Venture Capital Trusts (VCT)

The EIS is a scheme set up by the UK government to increase the flow of venture capital into UK firms. Companies use it to help them grow their businesses because it offers tax breaks to investors who buy shares in their firms. Specifically, the EIS lets firms raise £5 million per year up to a maximum of £12 million over the company’s lifetime.

The tax breaks for investors are substantial. You can claim relief of up to 30 percent on £1 million worth of investments per year in eligible companies, and up to 60 percent on “knowledge-intensive” firms. You can also claim an unlimited capital gains tax deferral, meaning that there is no limit on the CGT you can defer, as long as you make an investment in another qualifying company within 12 months. For investors who hold EIS investments for three years or more, no CGT is payable upon disposal.

EIS also offers loss relief at your marginal tax rate. If EIS company investments lose money when you sell them, you can offset this against both your income and capital gains tax.

Venture Capital Trusts (VCTs) are companies that buy small stakes in multiple early-stage companies across the UK. VCTs then provide additional support, designed to help startups under their umbrella succeed in the long-term.

Investors can claim significant inflation-beating income tax relief on the investments they hold in VCTs. Currently, rules allow for relief for up to 30 percent of their investment on the first £200,000 they invest each year. VCT holders can also benefit from tax-free dividends paid by the VCT.

Both EIS and VCTs mitigate some of the inflationary pressures that investors are facing by increasing real expected returns considerably above baseline. Reducing taxes preserves capital, accelerates accumulating funds, and increases expected long-run returns.

If you would like to discuss diversifying into the EIS scheme or VCTs, please arrange a free consultation with Allen & Atherton today.