The regulations on Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EISs) are changing according to the Finance Bill 2012:
Concerning the size of qualifying enterprise, The employee limit will change from fewer than 50 to fewer than 250 and a size threshold to gross assets of no more than £15m before investment and £16m after. The maximum annual amount that can be invested in an individual company will be £10m (from £1m).
These changes mean that VCTs can invest in larger, more established companies and with larger stakes.
However HMRC are taking a stronger line with “limited life” VCTs which have been popular lately. These VCTs tended to invest into target companies by way of loans as well as equity. Now the rules for investments, from April 6, 2012, require at least 70% to be into equity shares. This is more in keeping with the “spirit” of VCTs and the purpose of the tax breaks afforded such schemes – to reward investors for taking a risk on smaller companies.
So in a nutshell, qualifying investments are being tightened up. The result is I think that we may see fewer “limited life” VCTs after April 2012: it depends on how well the provider are able to re-arrange their investment strategies. However it is understood that the current VCT limited life offerings can still be approved, providing that they are invested before the end of the current tax year. So, for some VCTs we can expect to see closing dates brought forward and no more straddling both tax years this time around.
There is good news for EIS in that the increase in tax relief to 30% is not only confirmed but it will apply retroactively to any investments already made this tax year. Remember to put the correct numbers on your tax return – don’t expect HMRC to point this out for you.
This increase in the tax relief for EISs is very welcome and when combined with their other tax breaks (e.g. CGT free after 3 years, ability to receive rolled-over CGT gains, and IHT exemption make them very useful tax-wise.
The Treasury said it would create baby EISs – “seed enterprise investment schemes” which would apply to smaller companies: with 25 or fewer employees and assets of up to £200,000, which are carrying on or preparing to carry on a new business.
Income tax relief worth 50 per cent of the amount invested wouldn be available to individual investors with a stake of less than 30 per cent in such companies, including directors who invest in their companies.
The Treasury stated there would be an exemption from CGT tax on gains on shares within the scope of the SEIS and an exemption from CGT on gains realised from disposals of assets in 2012-13, where the gains are reinvested through the new SEIS in the same year.
So, between now and the end of March, anyone interested in EISs and VCTs should get in touch with their IFA (or preferably me if you are not an existing client!) to go through the current offerings and sort out a tax-efficient strategy that suits you.