Enterprise investment schemes (EIS) and venture capital trusts (VCTs) channelling investment into high-growth, knowledge-intensive companies received a boost in today’s autumn Budget. But the chancellor also announced that low-risk, capital preservation-type investments would no longer qualify for relief under the two schemes.
EIS and VCT schemes, which have been around since the 1990s, are tax-advantaged schemes that are designed to encourage investment in small, unquoted companies or those listed on the Alternative Investment Market (Aim). Often these companies struggle to attract the funding they need to grow. So the government incentivises investors to back these companies by offering tax relief. Both EIS and VCT investors receive 30 per cent income tax relief when their funds are put to work. And they do not need to pay capital gains tax (CGT) on any investment returns.
The differences between VCT and EIS
| Features | VCT | EIS |
| Structure | The VCT is a quoted company listed on the London stock exchange. The VCT company owns the investments in the underlying companies. | Direct investments in underlying companies. The investor is the beneficial owner of the shares |
| Minimum hold | 5 years | 3 years |
| Dividends | Tax-free | Taxed (although dividends rarely paid) |
| Inheritance Tax | na | Free from Inheritance tax after 2 years |
| Loss Relief | na | Where investments fail, losses can be set against CGT or Income Tax. |
Source: Calculus Capital
The chancellor announced that from 6 April 2018 the annual investment limit for EIS investors will double from £1m to £2m, so long as any amount above £1m is invested in knowledge-intensive companies. And the amount of annual investment knowledge-intensive firms can receive through EIS and VCT schemes will also double from £5m to £10m.
However, a new principles-based test will be introduced to ensure that EIS and VCT schemes are focused towards companies seeking investment for long-term growth and development, rather than those targeting low-risk, capital preservation returns.
In documents released alongside the Budget, the Treasury said: “The new ‘risk to capital’ condition depends on taking a ‘reasonable’ view as to whether an investment has been structured to provide a low-risk return for investors. The condition has two parts: whether the company has objectives to grow and develop over the long term (which mirrors an existing test with the schemes); and whether there is a significant risk that there could be a loss of capital to the investor of an amount greater than the net return.” HM Revenue & Customs will publish detailed guidance on this test when it publishes the 2017-18 Finance Bill.
The EIS and VCT industry had been anticipating changes to be made to the rules surrounding the schemes. And this year has seen a huge amount of VCT fundraising as managers rushed to raise money before the Budget.
Graham Neale, partner at Killik & Co, said: “We expected an announcement on lowering or eliminating the limits on lower-risk, asset-backed EISs; however, the government has been quite clever in that it is redirecting where investment should go by raising the limits on high-risk EISs."
And so far the response from the industry to the changes has been positive, particularly as the generous tax benefits on offer have not been cut.
"All in all, at first glance, today’s Budget seems to be good news for EISs and seed EISs (SEISs), for start-ups, growth companies and entrepreneurs, and for investors in these companies,” said Mark Brownridge, director-general of the EIS Association. The organisation was "extremely pleased to see that no changes to EIS tax reliefs or holding periods will be introduced, nor will there be any new exclusions for certain sectors”, he added.
Patrick Reeve, managing partner at Albion Capital, said the measures announced recognised the contribution made by VCTs to the economy. "VCT investments have created thousands of UK jobs and transformed small, innovative businesses into household names," he said. "The Treasury’s intention to focus the industry on innovation and growth is welcome."
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