Newsletter - Autumn 2012

Introduction »

Investment incentives to inspire

The Enterprise Investment Scheme (EIS) and the Venture Capital Trust Scheme (VCTs) are designed to encourage private individuals to invest in smaller high risk unquoted trading companies. The EIS requires an investment to be made directly into the shares of the company. VCTs are quoted investment companies, whose shares are traded on the London Stock Exchange.

Both have detailed rules concerning qualifying investors, shares, companies and trades and advice would need to be taken to ensure these conditions are complied with. Here is a reminder of the key tax breaks associated with these schemes.

Enterprise Investment Scheme (EIS)

There are three reliefs currently available for investments in an EIS:

  • income tax relief on investments up to £1 million per annum
  • a capital gains tax (CGT) deferral relief
  • CGT exemption on the disposal.

Income tax

Income tax relief of 30% is available on investments in newly issued qualifying ordinary shares. An investor’s tax liability is reduced by 30% of the amount invested provided it does not exceed the investor’s tax liability for the tax year.

A claim can be made to carry back the tax relief to the previous year subject to the overall investment limit for the previous year (£500,000 for 2011/12). This will be useful where there is insufficient income tax liability in the current year. To retain the income tax relief shares generally have to be held for three years.

CGT deferral relief

Capital gains on the disposal of any chargeable asset can be deferred where the gain is invested in EIS shares. The deferred gain will become chargeable when the EIS shares are disposed of but can be triggered in certain other situations.

To be eligible for deferral, a gain must be matched with an investment in EIS shares issued within one year before, or three years after, the gain accrues.

Capital gains and losses

Where qualifying shares are held for three years, then on disposal any capital gain will generally be exempt. Alternatively, where shares disposed of generate a loss, the loss is allowable, but is reduced by the income tax relief claimed.

Seed Enterprise Investment Scheme (SEIS)

This is a new separate ‘junior’ version of the EIS scheme designed to promote investment in new trading companies. It has been introduced with effect from 2012/13 for qualifying individual investors. As for the main EIS scheme there are detailed rules concerning qualifying investors, companies and trades.

There are three reliefs available for investments in the SEIS:

  • income tax relief on investments up to £100,000 per annum
  • CGT exemption on the disposal
  • CGT reinvestment relief.

Income tax

Income tax relief is given at the rate of 50% on investments in newly issued qualifying ordinary shares even if the individual is not a 50% tax payer. An investor’s tax liability is reduced by 50% of the amount invested and cannot exceed the investor’s tax liability for the tax year. To retain the income tax relief, shares generally have to be held for three years.

A claim can be made to carry back the tax relief to the previous year subject to the overall investment limit for the previous year. This will be useful where there is insufficient income tax liability in the current year. Note though that investments made in 2012/13 cannot be carried back to the previous year.

Capital gains

Where qualifying shares are held for three years, then on disposal any capital gain will generally be exempt. Alternatively, where shares disposed of generate a loss, the loss is allowable, but is reduced by the income tax relief claimed.

CGT reinvestment relief

Gains made on the disposal of any chargeable assets in 2012/13 where an investment is made in the SEIS scheme will be exempt from CGT. This means that for every £1 invested, £1 of any gain is exempted from CGT, saving up to 28% tax. This is subject to an overall maximum of £100,000.

Venture Capital Trusts (VCTs)

There are three reliefs currently available to investments in a VCT:

  • income tax relief on investments up to £200,000 per annum
  • exemption from income tax on dividends
  • CGT exemption on the disposal of shares.

Income tax

Income tax relief of 30% is available on investments in newly issued qualifying ordinary shares. An investor’s tax liability is reduced by 30% of the amount invested provided it does not exceed the investor’s tax liability for the tax year. No carry back facility is available and these shares have to be held for five years to retain the income tax relief.

Dividend exemption

Individual investors are exempt from income tax on dividends in respect of ordinary VCT shares whether acquired from a new issue or second hand.

CGT exemption

Disposals of VCT shares (both those acquired when new and second hand acquisitions) are exempt from CGT. There is no minimum ownership requirement to qualify but losses are not allowable. No deferral relief is available.

If these schemes are of interest to you, do contact us for further detail and advice about the requirements to be met to achieve the tax incentives available.

Introduction »