I am all in favour of backing risky, smaller companies. This is whyby Andy Davis / January 24, 2018 / Leave a comment
Published in February 2018 issue of Prospect Magazine
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.