BN 07: Changes to the Venture Capital Schemes

Who is likely to be affected?

  • Investors under the Enterprise Investment Scheme (EIS), the Corporate Venturing Scheme (CVS), and the Venture Capital Trust (VCT) scheme.
  • Companies attracting investment under those schemes.
  • VCTs.

General description of the measure

1. For VCTs:

  • The new rate of income tax relief for investors in VCTs will be 30%.
  • The minimum period for which VCT investors must hold their shares will rise to 5 years.
  • A change to the meaning of "investment".

2. Regarding the EIS:

  • The annual investment limit for income tax relief is doubled to £400,000.

3. Regarding EIS, VCTs and CVS

  • The limit in the maximum size of companies able to raise money under the schemes ("the gross assets test") is reduced to £7million before investment and £8 million afterwards.

Operative dates

4. The new measures take effect from 6 April 2006, apart from the change to the 70% qualifying holdings condition for VCTs, which has effect from 6 April 2007.

5. The change to the "gross assets test" will not apply in relation to funds raised by VCTs prior to 6 April 2006, nor to EIS or CVS shares subscribed for before 22 March 2006.

6. For EIS investments made by Approved Investment Funds (AIFs) raising funds the new gross assets test limits will not apply to investments made by AIFs which were approved before 22 March and which have started raising money before 6 April 2006.

Current law and proposed revisions

Income tax relief for investment in VCTs

7. Section 94 Finance Act 2004 introduced a two-year temporary increase in the rate of income tax relief available to VCT investors. That temporary rate of 40% applies to investments made before 6 April 2006, with the rate scheduled to revert to 20% thereafter. The new rate of income tax relief
that will now apply to VCT shares issued on or after 6 April 2006 will be the increased rate of 30%.

VCTs: Qualifying holding period

8. Under Schedule 15B, Income and Corporation Taxes Act 1988 (ICTA), individuals must hold VCT shares for a minimum period of three years to qualify for income tax relief. This period will rise to five years for shares issued on or after 6 April 2006.

VCTs: The meaning of "investment"

9. Under Section 842AA ICTA a VCT must have 70% by value of its investments represented by shares or securities in qualifying holdings to gain and retain approval. It must also have no more than 15% of its total investments in a single holding in any company. The new rules will mean
that any money that a VCT holds (or is held on its behalf) after 6 April 2007 will be treated as an investment for the purpose of these tests.

Annual EIS investment limit

10. Individuals can qualify for EIS income tax relief to obtain a reduction in their income tax liabilities of an amount up to 20% of the amount they invest in new full-risk ordinary shares in qualifying companies under Section 290 ICTA. This is subject to an investment limit of £200,000 per
tax year. With effect for shares issued on or after 6 April 2006 this limit is doubled to £400,000.

11. Under Section 289A ICTA, individuals who invest in eligible shares under the EIS scheme during the first six months of any tax year can choose to treat up to half of them as if they had been issued in the previous year, and claim relief accordingly, subject to a maximum carry-back figure of
£25,000. This figure is doubled from £25,000 to £50,000, with effect from 6 April 2006.

EIS, VCTs and CVS: The "gross assets test"

12. Under current rules the relevant assets of the company (or group of companies) raising money under the venture capital schemes may not exceed £15 million immediately before the investment and £16 million immediately afterwards. These limits will be reduced to £7 million and £8 million.

13. For VCTs the new limits apply to investment of funds raised after 6 April 2006 – for investment of funds raised before 6 April 2006, and money derived from such investments, the existing limits continue to apply.

14. For EIS and CVS the new limits apply to shares issued on or after 6 April 2006. But the old rules continue to apply in relation to shares issued after that date providing they were subscribed for before 22 March 2006.

15. EIS investments made by Approved Investment Funds (AIFs) will similarly be subject to the new limits from 6 April 2006. But where an AIF was approved before 22 March 2006 and was raising money before 6 April 2006, investments can be made in companies which meet the old gross assets limits.

Further advice

16. If you have any questions about these changes, please call Malcolm White 020 7147 3175. Information about Budget measures is now available.

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