Good and bad news for the EIS and VCTs

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’.