United Kingdom: EIS - A New Lease Of Life?

Last Updated: 6 May 2008
Article by Paul Garwood

The 2007 Budget led to a decline in EIS and VCT investments. But new incentives and benefits announced in the 2008 Budget look set to build an appetite for EIS.

After the seismic changes that altered the landscape for Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT) investments in 2007, the venture capital industry was able to breathe a sigh of relief following the 2008 Budget. The increase in the amount on which an EIS investor may claim income tax relief, from £400,000 to £500,000 per tax year as of 6 April 2008, is likely to boost their appeal.

Unwelcome Restrictions

There were two main issues that arose for EIS in 2007. Firstly, the 2007 Budget included a new investment limit into an EIS/VCT qualifying company no more than £2m in a 12-month period. Combined with the reduction in the overall gross assets test of a company from £15m/£16m to £7m/£8m, the profile of potential investee companies was drastically altered. For Aim and large generalist managers in the VCT sector, this seriously constrained the profile of companies in which they are able to invest, but boosted the small cap experts.

Secondly, the October 2007 PBR included a new, single flat rate of CGT at 18%, together with the abolition of indexation and business asset taper relief (only 10% tax on a disposal of an unquoted or Aim-listed trading company held for no less than two years).

Welcome Relief

The Chancellor has subsequently announced the 'entrepreneurs' relief', effective from 6 April 2008. This applies to people who sell their businesses and also to directors or employees who own more than 5% of the shares in a trading company. The idea is that an entrepreneur will suffer only 10% tax on the first £1m profit from any assets sold, if held for at least one year.

The impact on EIS of the new 18% tax rate for CGT deferral purposes is likely to be positive in the short term. People who have already made gains may seek to 'wash through' their 40% CGT liabilities to 18% ones by making an EIS investment. And since an investor can claim CGT deferral on gains made up to three years prior to the date of the EIS investment, there could be a big increase in the number of investors looking to make this immediate 22% uplift.

Gentle Persuasion

The ability to defer gains will last beyond 5 April 2008. For this reason, many people may be planning to invest in the EIS over the next couple of years to take advantage of the 20% income tax relief available on EIS investments.

After 5 April 2008 any gains made will crystallise at 18% rather than 40%. So it seems likely that a reasonable number of investors will shirk away from making an EIS investment and pay the tax instead. However, there will also be a number of investors realising gains at 18% who were previously being taxed at 10% before 5 April 2008 so it is possible that these two groups could balance each other out.

A Brighter Future?

Finally, the overall cocktail' of tax benefits uniquely available through the EIS is still potent and should encourage investors looking for a variety of tax shelters: 20% initial income tax relief, CGT deferral, no tax on any uplift in value on EIS shares and exemption from inheritance tax after two years. Last, and hopefully least, loss relief can help cushion the blow if the investment does not go as well as anticipated.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Authors
Paul Garwood
 
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