There has been a major overhaul of venture capital trusts (VCTs) and enterprise investment schemes (EISs).
The changes come as a response to a government consultation paper last summer which looked at patient capital”. This was defined by the Treasury as “long-term investment in innovative firms led by ambitious entrepreneurs who want to build large-scale businesses”.
The paper criticised some EIS and VCT providers as overly cautious and tax-driven.
Notably the paper said, “Industry estimates suggest that the majority of EIS funds … had a capital preservation objective in tax year 2015/16, and around a quarter of VCTs have investment objectives characteristic of lower risk capital preservation”. In response, the venture capital scheme market rushed to raise fresh funds before the Autumn Budget.
From March 2018, the following new rules apply:
- ‘Risk to capital’ condition VCT and EIS investments must be made in companies that have objectives to grow and develop, and where there is a significant risk of loss of capital, after allowing for tax relief. This is to prevent the emphasis on capital preservation criticised in the consultation paper.
- VCT investment VCTs are now required to invest at least 30% of new funds raised in qualifying companies (capital at risk businesses) within one year of the end of the accounting period in which the money is raised. This change will encourage VCTs to raise smaller amounts more frequently.
From April 2019, the minimum proportion of qualifying companies held by a VCT will rise from 70% to 80%.
- Loans made by VCTs VCTs can no longer offer new secured loans to companies, while any effective interest rate charged above 10% must represent no more than a commercial return on the loan.
- Subscription limits For EISs, the subscription limit for income tax relief was doubled to £2 million from 6 April 2018, subject to any excess over £1 million being in ‘knowledge-intensive’ companies. The maximum income tax relievable subscription for VCTs remains at £200,000 per tax year.
There were no changes to the levels of tax reliefs given to VCTs and EISs. The main rate of income tax relief for subscriptions remains at 30%. The relief can be clawed back if the investment is sold prematurely or ceases to qualify and these clawback periods remain at five years for VCTs and three years for EISs.
VCT dividends are still tax free, subject to a maximum investment of £200,000 per tax year. Similarly, the capital gains tax advantages of VCTs and EISs were left intact.
These reforms add greater risk to VCT and EIS investment, making it more crucial than ever to take expert advice before committing your capital to such schemes.
The value of your investment can go down as well as up and you may not get back the full amount you invested.
Past performance is not a reliable indicator of future performance.
Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.
Some VCT and EIS investments may be difficult to sell and tax benefits depend on maintaining their qualifying conditions.
Levels and bases of taxation and tax reliefs are subject to change and their value depends on individual circumstances.
The Financial Conduct Authority does not regulate tax advice.