The dust has settled following what has been one of the most closely fought elections in a generation

Without the need for a coalition partner, one would assume that most of what appeared in the Conservative party’s manifesto should eventually become reality.

The election was in part won on the back of the promise to not raise VAT, National Insurance contributions or Income Tax for the next five years. This was combined with equally headline grabbing promises to increase the level at which the higher rate income tax band applies to £50,000 and to increase the inheritance tax thresholds for married couples and civil partners from £650,000 to a combined £1m. So far, so good.

However, the government also has to balance the books and not all of these giveaways can reasonably be expected to come from the sunlit uplands of economic growth. There will continue to be large cuts to public services over the next five years and job creation in the private sector will be essential in order to avoid the negative effects of rising unemployment.

The Enterprise Investment Scheme (EIS), its junior sibling the Seed Enterprise Investment Scheme (SEIS) and the related Venture Capital Trust (VCT) scheme are a key aid to growth and have received cross party support during successive governments. Given the benefit to the economy and jobs created by these government sponsored schemes, this is hardly surprising. What is less obvious is the benefits are not confined to the private sector, with much if not all of the explicit cost of the schemes filtering back to HMRC and the chancellor through increased NI payments and corporation tax receipts.

These schemes are more constrained by European Union legislation and tinkering around the rules on ‘State Aid’ than domestically originated change. So, leaving aside the arguments for or against leaving the EU, an EU ‘Britexit’, which now is a genuine possibility given the conservative promise of an EU ‘in / out’ referendum by the end of 2017, Britexit would see the government significantly less constrained in its support of smaller companies.

At the same time, what is certain is that the state spends a huge amount in pension tax relief, primarily in the form of up-front income tax relief on employee and employer contributions (at a cost of £26.1 billion in 2010-11). NIC relief on employer contributions totalled a further £13.0 billion. To put this into context, this total is roughly equivalent to the UK defence budget of around £40 billion. Almost a third of this (£7 billion) goes to higher rate tax payers and this is well and truly in the government’s crosshairs. The Conservatives plan to reduce the annual allowance for those with taxable incomes over £150,000 so that it falls from £40,000 to £10,000 by the time income reaches £210,000. According to their manifesto, this extra revenue will be used to fund a further inheritance tax break for married couples…

“And we will take the family home out of tax for all but the richest by increasing the effective Inheritance Tax threshold for married couples and civil partners to £1 million, with a new transferable main residence allowance of £175,000 per person. This will be paid for by reducing the tax relief on pension contributions for people earning more than £150,000.”
Conservative Manifesto 2015

The above scheme might be overly complicated and the government may just opt to increase the individual threshold for married couples to £500,000 per partner regardless. Whatever the final policy is it will affect another tax efficient scheme – Business Property Relief (BPR) but in all probability the impact will be marginal.

Tackling tax evasion and aggressive tax avoidance will also remain on the agenda, as society’s tolerance for this is now long gone. The government has committed to increasing the annual tax charges paid by those with non-domiciled status and ‘non-doms’ will be keener than ever to look at ways to invest tax efficiently to offset their UK originated income tax bills.

In summary, whilst there will undoubtedly be turbulence around our relationship with Europe and the structure of the United Kingdom, the world of smaller company investing, and the capital available to support smaller companies through the tax efficient schemes, should continue its steady upward trajectory for some time yet.