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
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
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.
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
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general guide to the subject matter. Specialist advice should
be sought about your specific circumstances.
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