Savers pour money into risky investments amid fears of Starmer tax raid

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Ricky Mehta, 49, aims to offset a large capital gains bill with more tax-efficient investments – Rii Schroer

With Sir Keir Starmer in Number 10, British investors are taking action to shield their portfolios from a tax raid down the line.

Ricky Mehta, 49, said he was moving his money into riskier funds because he fears Labour’s victory could signal tax rises for people like him with money tied up in both property and equities.

The IT consultant from London has been intending to sell his rental property ever since the rate on his buy-to-let mortgage increased fourfold. “I used to make a £800 profit. Now I’m losing £200 every month,” he said.

Now, like many other landlords, Mr Mehta is concerned that a capital gains tax rise under Labour could eat into his profits from the sale.

However, he has a plan to protect himself from a large tax bill. Each year he invests around £15,000 into Venture Capital Trusts (VCTs), Enterprise Investment Schemes (EIS) and Self-Employment Income Support Schemes (SEISS) which offer a raft of tax reliefs to encourage the flow of capital in small-to-medium sized companies.

He intends to invest his gains from the house sale – expected to be around £15,000 – exclusively in EIS funds, a scheme introduced by the government in the 1990s to help small businesses raise money.

All three venture capital schemes are high-risk. However, unlike VCTs – which may hold more than 30 companies – EIS funds are highly concentrated, holding only around 10 stocks. This makes them especially volatile.

But Mr Mehta thinks an investment is worth it.

“EIS is slightly riskier than VCTs. But I will put more into them because I think Starmer’s going to increase capital gains tax and hammer property and pensions. This way I can offset the capital gains tax.”

To reflect the higher risk, EIS investments offer generous tax relief that lets investors defer their capital gains tax liabilities.

As long as a gain is made in the three years before or a year after an EIS investment, then the investor can “defer relief” against those profits at up to 24pc for residential property or 20pc on other gains.

Upon the sale of the investment, the deferred gain becomes taxable again. To avoid paying the charge, an investor can choose to hold onto the fund or reinvest in another EIS.

They must hold the shares for at least three years to qualify for the relief.

On top of this, investors can avoid paying capital gains tax on the growth in the value of either VCTs, EIS or SEIS. The maximum you can invest tax-efficiently into VCTs is £200,000 per tax year and up to £1m for EIS.

Tax has been top of investors’ minds in the run-up to the election.

Jonathan Raymond, of wealth manager Quilter Cheviot, said capital gains tax in particular was “the primary driver of conversations” with clients throughout the campaign.

“It is unlikely many, if any, tax allowances and thresholds will become more generous,” he said. “We have seen some clients accelerating plans, as a result, to sell buy-to-let properties.”

Fears of a tax raid under Labour drove households to save £4.2bn into Individual Savings Accounts (Isas) last month, the highest amount saved in May on record. Income earned in these accounts can grow tax-free.

Sri Moorthy is concerned about a Labour raid on his pension – Paul Grover

Sri Moorthy, 56, from Wimbledon, south-west London, said he had maxed out his annual Isa allowance in anticipation of a Labour victory.

However he has avoided letting his Self-Invested Personal Pension exceed £1.07m, in case the new government reintroduces the lifetime allowance.

Labour U-turned on its promise to reinstate the charge on how much people can save into their pensions over the course of a lifetime. However, this was not a manifesto pledge and it could still reverse the decision again. “I need to be careful as that would be detrimental to me,” said Mr Moorthy.

Most of Mr Moorthy’s £600,000 portfolio is invested in US trackers, with only a tiny amount of exposure to the London market. “I had good luck recently with Raspberry Pi’s Initial Public Offering,” he said, referring to the Cambridge-based microcomputer maker that floated on the London stock market a few weeks ago.

“It was a one-off for me but that does go to show there’s potential in London. However, I’m still not sure what to make of the London market.

Analysts have been hopeful that a Labour government could bring stability to Britain, making it a more attractive place for companies. Both the FTSE 100 and the pound edged up after news of Sir Keir’s victory.

Michael Born, of research firm Morningstar, said: “If we see continued strong economic performance under this new, and importantly stable government, and rate cuts by the Bank of England, there is definitely a case to be made that the valuations and levels of yield available to UK investors should make the country an attractive prospect for asset allocators.”

But it seems this optimism has yet to influence domestic investors, who remain cautious about their home market. Mr Raymond said: “When it comes to the investments themselves, we have seen more of a shift from clients to invest more internationally as opposed to in UK equities, but this is a long-term story and the election neither accelerates or reverses this trend on first impressions.”

Labour previously backed the Tories’ plans for a “British Isa” that would give investors an extra £5,000 annual allowance to invest tax-free in the London stock market.

While it may not “move the dial in terms of quantum of capital being funnelled into UK equities,” Mr Raymond said, it could nudge more people to invest in their home market.

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