A series of new tax measures coming from this year’s Budget are set to boost Enterprise Investment Schemes.
VCTs and EIS both invest in small and medium sized businesses, many of which should be beneficiaries from the budget, experts say.
In particular, the steep cut in Capital Gains Tax from 28 per cent to 20 per cent is seen as a big boost for EIS investments.
Charles Owen, the founder of Coinvestor, says any capital gain that has been deferred, by investing that gain into an EIS scheme, will be eventually taxed at a lower rate as a result of these changes.
Tilney Bestinvest managing director Jason Hollands says CGT look set “to prompt a stampede of interest” in EIS.
“This is because investment in EIS not only provides a 30 per cent income tax credit, it also enables those who have incurred a capital gain to defer their capital gains tax liability by reinvesting their gain into EIS companies. The tax liability doesn’t disappear but recrystallises when the shares are sold but it is then calculated at the prevailing CGT rates at that time.
“Importantly, this deferral feature can apply to gains incurred up to 36-months prior to subscribing for the EIS shares, so those who have realised a hefty gain over the last three years, for example on the sale of shares, now have an additional incentive to make use of EIS to defer that gain and reduce their tax liability when the gain recrystallises at the new, lower rates.”
Jean Miller, the chief executive at InvestingZone, says the reduction in CGT is important, but she welcomes the extension of entrepreneurs’ relief in unlisted companies to encourage investment in EIS.
Chancellor George Osborne confirmed today that, along with doubling small businesses rate relief, entrepreneurs will be able to access a 10 per cent rate of capital gains tax on newly issued shares in unlisted companies purchased on or after 17 March 2016, provided they are held for a minimum of three years from 6 April 2016.
Miller says: “Start-ups and mid-sized companies play a crucial role for jobs, exports and growth, so more can always be done to help. The government could go a step further by removing the seven-year rule on EIS eligibility, which disadvantages companies on potential investment, purely because they have been operating for seven years. This is precisely at a time when they need expansion capital to grow and compete globally.”
However, Deepbridge Capital head of marketing Andrew Aldridge says the reduction of the capital tax gain is unlikely to “significantly” impact investor demand for EIS and Seed EIS propositions.
He says: “Where individuals are utilising EIS or SEIS propositions to defer or offset CGT, the total sums involved are likely to be of a significant level that deferral or exemption is still appealing.”
As announced in the latest Autumn Statement, the government has confirmed today it will exclude all remaining energy generation activities from EIS, SEIS and VCTs with effect from 6 April 2016, as well as from Social Investment Tax Relief.