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Categories:Investments,Other

Tony Wickenden: Introducing Seis and changes to VCTs and EIS

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Investment opportunities are widening with the introduction of the Seis and changes to EIS and VCTs

Last week I started to look at the new seed enterprise investment scheme.

The basic tax rules in relation to this new scheme, scheduled to be available from April 6 this year to, initially, 5 April 2017, are as follows:

  • The maximum total individual investment in the Seis will be £100,000 per tax year. In contrast, the plain vanilla enterprise investment scheme (EIS) has a limit of £1,000,000 from 2012/13 (£500,000 currently), although it offers only 30 per cent income tax relief rather than the Seis’s 50 per cent relief.
  • An eligible Seis company must:

- be no more than two years old;

- have 25 or fewer full-time equivalent employees;

- have gross assets of not more than £200,000; and

- may raise no more than £150,000 in total (not per tax year).

  • An exemption from capital gains tax will be available for 2012/13 for individuals who realise gains in 2012/13 that are reinvested, wholly or in part, in a Seis. For an EIS, the capital gains tax relief is a deferral of the gain reinvested, not an outright exemption. However, there is no limit on the amount of gain that can be deferred. If income tax relief is not claimed, there is also no limit to the percentage shareholding that may be acquired in an EIS company (it could be 100 per cent), whereas the Seis share-holding ceiling is 30 per cent.

I am grateful to our Techlink Professional editorial team for the next part of this article giving more detail on the Seis and comparing it with the VCT/EIS investments.

The limits applied to the Seis are such that investments are likely to be made at the business angel’s end of the venture capital market rather than in the retail area occupied by venture capital trusts and some EIS. The Treasury acknowledges this in its estimates of the tax cost of the EIS.

Even during the scheme’s first year, when relief poten-tially at up to 78 per cent (50% + 28%) is available, the cost is estimated to be only £50m.

That implies total investment of between £64m and £100m, with the figure probably at the lower end.

For comparison, VCTs raised about £350m in 2010/11. The latest HM Revenue & Customs data for the EIS show that around £500m was raised in 2008/09.

From 2012/13 the Finance Bill 2012 will also be intro-ducing new rules for VCTs and EISs which were originally announced in the 2011 Budget. The main changes are:

  • a relaxation on the definition of shares which may qualify for EIS relief to include certain shares with preferential rights;
  • the removal of the current £1m limit for VCT investment for companies not in partnership;
  • an increase in the individual subscription limit for the EIS to £1,000,000 per tax year;
  • an increase in the size of companies for VCT and EIS investment (subject to EU state aid approval):
  • the maximum number of full-time employees will increase from 49 to 249;
  • the maximum amount of gross assets held by the company before/after investment will rise from £7m/£8m to £15m/£16m; and
  • the maximum a company can raise each year from all tax-relieved venture capital schemes will increase from £2m to £10m.

As a quick guide, the pros and cons of each scheme in 2012/13 is given in the table below.

On the negative side, there will be a new disqualifying purpose test for VCTs and EISs. HMRC says the test will disqualify shares which “are issued subject to arrange-ments whose main purpose is to generate access to the reliefs in circumstances where either the benefit of the investment is passed to another party to the arrangements, or the business activities would otherwise be carried on by another party”.

This measure is primarily aimed at limited-life arrangements, which have been a popular breed of VCT.

It is worth repeating that anyone considering investment in the Seis needs to be aware that there are very sound reasons why the Treasury is prepared to grant such a high level of tax relief.

 

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Readers' comments (1)

  • Super!

    Great planning vehicle from the Tories.

    Rich-poor gap? Bit wide off the mark I say....

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