EIS tax relief rises to 30 per cent

Income tax relief on Enterprise Investment Schemes (EIS) is to rise from 20 to 30 per cent from 6 April 2011, while both EIS and venture capital trusts (VCTs) are likely to be able to invest in larger companies from next year. The moves will increase the attractiveness of both for higher-rate taxpayers.

Subject to subject to EU state aid clearance, from April 2012 both EIS and VCTs will be able to invest in companies with 250 employees rather than the current 50, and gross assets of £15m rather than £7m. This could in particular provide a new lease of life for Alternative Investment Market (Aim) VCTs, which almost dried up after April 2006 when the size limits were revised down. Many companies traded on Aim have gross assets of more than £7m

VCTs and EIS will also be able to invest up to £10m a year in a company from April 2012, instead of the current £2m. EIS and VCTs are venture capital funds which typically provide capital to early stage businesses.

From an investor perspective, this will put EIS on more of a level playing field with VCTs, which already offer 30 per cent income tax relief. You only have to hold your investment in an EIS for three years to qualify for the relief, as oppose to five with a VCT, while EIS also offer inheritance tax relief if held from more than two years, and capital gains tax deferral.

The annual amount you can invest in an EIS will also be increased from £500,000 a year to £1m, while for VCTs the annual investment limit stays at £200,000. In view of the change in rules, some EIS fund raisings due to close by the end of this tax year may remain open beyond the 6 April to allow investors to benefit from 30 per cent income tax relief. But EIS are not listed so you cannot dispose of your holding in the secondary market as you can with VCTs. In addition, VCTs pay tax-free dividends to investors, while EIS do not.

But energy-generation businesses that rely on Feed-In Tariffs will no longer be approved investments after 6 April 2012, effectively sounding the death knell for VCTs and EIS investing in areas such as solar and wind power - unless they can make their investments and connect them to the national grid before that date.

There was already uncertainty over the future of solar and clean-energy VCTs after a Department of Energy & Climate Change consultation proposed a reduction in tariffs for projects over 250 kilowatts after 31 July this year.

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