Enterprise investment schemes (EIS) and Venture Capital Trusts (VCTs) are arguably the biggest beneficiaries of the recent Budget. Both enjoyed a popularity boost in 2010/11 when the 50% tax rate was introduced, as high earners looked for alternative ways to get tax back.
From today, the tax reliefs available on EIS and VCTs, which generally invest in smaller or newly established companies, are to be extended in a bid to encourage greater investment. In summary:
- EIS already offer capital gains tax (CGT) deferral, with exemption from CGT for any gains made on EIS qualifying shares held for three years or more.
- The dividends are CGT-free in VCTs, which offer 30% income tax relief on investments up to £200,000 each tax year, provided the investment is held for five years.
- There will also be 30% tax relief on EIS from today, after the government raised it from 20% recently.
- There are several other changes that we believe will be of interest to our clients, looking at tax planning.
- From April 2012, the maximum that both EIS and VCTs can invest in individual companies will jump from £2 million to £10m and they will be allowed to invest in firms with up to 250 employees, up from the present 50 staff limit. This widens the scope for investment.
- The amount that individuals can invest in EIS every year will double to £1m April 2012, at which point the qualifying company limits for both VCTs and EIS will rise from £7m to £15m.
At Morton Fraser we believe these changes will expand the level of investment available to smaller companies, ensuring that both EIS and VCTs can do more to help them grow their businesses. Indeed, some commentators predict that the changes will trigger a surge of interest that could see investment volumes rise considerably.
With identical income tax relief to VCTs and a shorter holding period, and the additional benefits of deferring capital gains, utilising loss relief and inheritance tax relief, all of which VCTs do not offer, they are now much more attractive to investors. Perhaps the benefits of EIS outweigh those of the VCT, however these are complex investments and only suitable in the right circumstances, where clients understand and accept the higher associated investment risk.
Perhaps one risk of the higher tax relief is that these investments start to appeal to a wider-market and attract investors for whom they are not suitable. Both EIS and VCTs are designed to support smaller, less established enterprises and tax benefits are given because they carry higher levels of investment risk.
The risks, the costs, and the complexity of the schemes make it highly advisable to get specialist advice before buying in, and while tax is the real driver of the popularity of the vehicles, the type of different products within the sectors, and the levels of risk and return on offer, vary widely and therefore individual advice is essential.