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Investors using the Enterprise Investment Scheme as a tax-efficient wrapper were today rewarded with a surprise doubling of the investment limit, but told that the scheme rules would be tightened to prevent investors using it for low-risk assets.
Commentators had expected EIS and Venture Capital Trusts (VCTs) to be targeted by the chancellor for reductions in tax relief in the Budget. Instead, he said he would double the maximum investment in EIS schemes from £1m to £2m, providing investors put money into “knowledge-intensive” companies.
From April 6 2018 an individual investor will now be able to earn up to £600,000 in tax relief, up from £300,000 in the current tax year. Investors earn 30 per cent tax relief on investments in EIS as an incentive to drive funds towards higher-risk companies. About 4,000 investors a year are expected to benefit from the increased investment limit, according to Treasury estimates.
The government said it expected the change to add £7bn to the total committed to early-stage enterprises.
But the government also said it wanted to crack down on investors using tax-efficient schemes to hold low-risk investments rather than the innovative high-risk companies the scheme is designed to help. The government said it would be introducing a new test to reduce funds flowing to low-risk investments as part of the finance bill.
The move is part of the government’s patient capital review designed to stimulate growth in early-stage businesses. A consultation paper published by the Treasury in August 2017, Financing Growth in Innovative Firms, identified a £4bn funding gap between US and British firms and looked at ways to ensure start-ups were receiving access to the financing they needed.
At the time, the government expressed concern that too many EIS and VCT investments were focused on “capital preservation”.
Luke Davis, chief executive of private equity firm IW Capital, said: “The devil here is in the detail — how ‘knowledge-intensive’ and ‘low-risk’ are quantified are yet to be seen and measures that I will be observing keenly when the Treasury releases the full suite of official documents.”
Sacha Bright, chief executive of alternative finance marketplace businessagent.com, said: “It seems clear that the government is targeting large sums of money invested in tax vehicles, rather than growth company investment vehicles, with the EIS and VCT changes.
“This makes it awkward for some investment managers for whom tax-efficient investment in so-called ‘safe investments’, where the risk to your capital investment is minimised as much as possible, has been highly profitable.”
Alex Davies, chief executive and founder of Wealth Club, a broker, said: “Unexpectedly, this has been a very good Budget for VCT and EIS investors. It rewards entrepreneurial companies and investors who are prepared to take some risk to support British business. Whilst there will be restrictions on some capital preservation focused products, investments made in the spirit of EIS will benefit burgeoning business and their investors.
“With all the changes to pensions beginning to bite this type of investment is only going to grow in popularity.”
Andrew Boyle, chief executive at LGB & Co. said: “Fears of a radical change to EIS and VCT investing rules were unfounded.
“Continued support for early-stage businesses is key to what the chancellor described as Britain’s position as the forefront of a technological revolution.”
Jason Hollands, managing director at Tilney Group, said: “From an investor perspective the EIS changes are really of interest to very wealthy business angels who have over £1m to invest in unquoted companies in a year.
“But it also has a potential impact for VCTs, as a doubling of the amount a knowledge-intensive company can receive in a year from £5m to £10m may encourage some VCT families to do bigger deals into these companies, potentially co-investing alongside other VCTs.”