Important changes to the Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT) rules came into effect this April.
They will be good news for knowledge-intensive companies. However, the introduction of a risk-to-capital condition will be less welcome to many investors.
The good news
The maximum you can invest in an EIS and benefit from 30% tax relief has doubled from £1 million to a total of £2 million a year. The £1 million limit still applies to normal EIS investment, but you can now invest a further £1 million in knowledge-intensive companies.
A knowledge-intensive company, very broadly, is one that spends large amounts on research and development or innovation, and either creates intellectual property or has lots of highly-skilled employees.
Existing rules mean your EIS investment:
- Can be backdated to the previous tax year if you don’t have sufficient tax liability for the year of investment.
- Is not normally subject to capital gains tax when you sell it.
- Normally qualifies for 100% inheritance tax business relief after you have owned it for at least two years.
The bad news
The government has introduced a risk-to-capital condition which applies to all EIS and VCT investments (including the Seed Enterprise Investment Scheme). Investments that have been structured to provide a low-risk return for investors will no longer qualify for tax relief. The idea is to encourage investment in genuinely entrepreneurial companies where there is a significant risk of loss of capital.
This is not so unreasonable given the generous tax reliefs available for EIS and VCT investment. But the new condition introduces a degree of subjectivity, which depends on HMRC taking a ‘reasonable view’.