The FSA is cracking down on venture capital trusts and enterprise investment schemes that are being marketed primarily on the tax incentives offered without highlighting the risks involved.
In a financial promotions update, the regulator says the increase in tax relief and the wider reform of the VCT and EIS sector are likely to result in an increased demand for the products.
The changes in the 2011 Budget saw EIS receive more favourable treatment with Chancellor George Osborne increasing the level of income tax relief from 20 per cent to 30 per cent from April 2011.
From April 2012, the Government will double the annual EIS investment limit for individuals to £1m. It will increase the qualifying company limits from 50 to 250 employees and gross assets from £7m to £15m for both VCTs and EIS.
The Government will also raise the annual investment limit for qualifying companies by 400 per cent to £10m for both vehicles.
The FSA says that both the investment vehicles should promote the tax benefits in a balanced way and that firms must take responsibility for what appears.
It says: “We have noted that enterprise investment scheme/ venture capital trust investments are often highly promoted on their preferential tax status.
“Where this is the case, the promotion must include a prominent reference that the tax treatment depends on the individual circumstances of each client and may b subject to change in future.”
“In addition, the availability of tax reliefs depends on the companies invested in maintaining their qualifying status. Please refer to the HM Revenue & Customs website for further guidance on the tax relief available on EIS/VCT investments.”
Chelsea Financial Services head of investments Matthew Woodbridge says: “There will be more demand on the back of the new rules and it always helps when the FSA gives us guidelines to operate around over promotion of these products.”