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Investment for Venture Capital

Changes to the Enterprise Investment Scheme (EIS) and Venture Capital Trust

(VCT) scheme were announced to improve the way they work, make the

schemes more attractive to investors and benefit small higher risk companies seeking funding.

The changes will, primarily,

 reduce from 5 years to 3 years (for shares issued on or after 6 April 2000) the minimum period for which investments in VCT or EIS companies carrying on a qualifying trade at the time of issue must be held if they are to qualify for income tax relief;

 make it easier for EIS investors to invest alongside venture capital funds (by changing the definition of control);

 prevent tax reliefs under both the EIS and VCT scheme being put at risk if the company in which an investment has been made goes into receivership;

 safeguard VCT investors&#39 reliefs where a company in which the VCT has invested is sold, merges, or undergoes a capital reconstruction, and the VCT receives shares rather than cash.

What follows is a summary of the key provisions currently in existence.

The Enterprise Investment Scheme (EIS) offers tax relief on an investment in new shares of an unquoted trading company. For tax year 1999/2000 an investment of up to £150,000 can be made to secure income tax relief at 20%. The EIS must be invested in the new shares of an unquoted trading company which satisfies certain conditions and so the investment risks are higher. Certain AIM companies would qualify as EIS companies.

Capital gains tax deferral relief is also available on investments in an EIS. The amount of deferral relief is unlimited provided some of the amount invested in the EIS potentially qualifies for income tax relief. This means that if a taxable gain arose, such a gain can be deferred if reinvestment in an EIS takes place within three years of the disposal. For a higher rate taxpayer this relief, coupled with the income tax relief, will give a total initial tax relief of up to 60%.

Venture Capital Trusts also provide immediate 20% income tax relief for an investment in new shares of up to £100,000 in a tax year, coupled with capital gains tax deferral relief (restricted to the lesser of the amount invested and £100,000) if some income tax relief is actually obtained. However, in the case of an investment in a VCT, deferral relief is only available if an investment is made within 12 months of the date of the capital gains tax disposal.

Since July 1997, EISs with certain &#34guarantee&#34 arrangements and VCTs which invest in guaranteed loans and securities have been prohibited. In addition, from 17 March 1998, tax relief is not available on investments in companies whose trade includes certain property-backed activities.


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