VCT and EIS granted greater powers

EU approval was required because the changes were deemed a form of state aid for small companies. These rule changes mean VCTs will be allowed to:

■ invest in companies with assets of up to £15m, in contrast to the previous £7m limit;

■ invest in companies with up to 250 employees (previously 50); and

■ put up to £5m a year into a company instead of the former limit of £2m.

VCTs and EIS are funds that invest in unquoted or Alternative Investment Market (Aim) shares of smaller companies, enabling private investors to access assets they could not put money into directly. They offer a range of benefits including a 30 per cent income tax break on your investment, provided you hold the VCT shares for at least five years and EIS shares for at least three. EIS also offer capital gains tax (CGT) deferral and inheritance tax relief, and VCT dividends are tax free. Neither vehicle incurs CGT upon disposal of the shares.

"The State Aid rules set stringent conditions on the level of government help which can be provided to small to medium enterprises," commented Ian Sayers, director general of the Association of Investment Companies (AIC). "But the new investment freedoms VCTs are getting will create exciting opportunities for both VCTs and the hundreds of small businesses they invest in. They will reinforce VCTs' ability to finance small to medium enterprises struggling to secure development capital and support the government's growth agenda."

Investors in VCTs and EIS could benefit from better returns and lower risk if they are able to access a wider range of investments.

VCT and EIS investment capabilities before and after changes

Source: AIC