I am all in favour of backing risky, smaller companies. This is whyby Andy Davis / January 24, 2018 / Leave a comment
As the end of the financial year comes into view, better off investors will once again stage an 11th-hour dash to put money into schemes that offer tax breaks to backers of risky small companies and start-ups.
Both Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT) investments attract 30 per cent tax relief on the sum committed up to a prescribed limit, and charge no tax on capital gains provided the shares are held for a minimum period (three years for EIS, five for VCTs). VCTs in addition incur no tax on dividends.
But despite these attractions, this spring might not match the totals ploughed into EIS and VCTs in previous years—mainly thanks to government efforts to stop asset managers repackaging low-risk ventures to qualify for these schemes and thereby helping wealthy clients to harvest large sums in tax relief with little chance of losing money.
In last autumn’s Budget, Chancellor Philip Hammond announced new tests to ensure tax breaks went only to investments supporting genuinely high-risk ventures along with a surprise doubling of the annual limit for EIS investments to £2m.
Before the Budget, there was speculation that EIS and VCT tax breaks could shrink, and many VCT managers launched pre-emptive fund-raising campaigns just in case. What Hammond eventually decided makes far more sense: provided the money is going into high-risk business opportunities designed to create growth and jobs, a sizeable tax sweetener is much easier to justify.
I am all in favour of backing risky, smaller companies and personally hold both EIS and VCT investments, the most recent with the VCT manager Amati. I’m also an EIS shareholder in several companies including the equity crowdfunding platform Syndicate Room, which is now offering two interesting investment opportunities, via two new funds.
One, Fund Twenty8, will invest in a portfolio of at least 28 early-stage companies that raise money via its crowdfunding platform, providing unusually diversified exposure to EIS holdings. Its Growth Fund will make fewer, bigger investments in companies that have already raised money via Syndicate Room but are now raising larger sums from professional venture capital firms. The opportunity to co-invest directly alongside VC funds has not until now been available to private individuals with relatively small sums at their disposal, but the Growth Fund gives us a way in to these slightly lower-risk follow-on investment rounds.
Given I am a Syndicate Room shareholder, you should take what I say with a large pinch of salt. But opportunities like these make a lot of sense to me. They offer decently diversified exposure to high-risk, high-growth investments that were previously hard to access, while allowing higher-rate taxpayers to offset a big chunk of their liability. A worthwhile incentive, in other words, to take some genuine risk.
Now read an interview with John Glencross on what the government’s new investment initiatives mean for business