A new era for VCTs and EISs as rules change

A major overhaul for venture capital trusts (VCTs) and enterprise investment schemes (EISs) took effect in March and April 2018.

The changes come as a response to a government consultation paper published last summer on “patient capital”. The paper criticised some EIS and VCT providers, saying, “Industry estimates suggest that the majority of EIS funds … had a capital preservation objective in tax year 2015/16, and around a quarter of VCTs have investment objectives characteristic of lower risk capital preservation”.

Two key points emerged from the new rules:

  • ‘Risk to capital’ condition VCT and EIS investments must now be made in companies that have objectives to grow and develop, and where there is a significant risk of loss of capital, after allowing for tax relief. This is to prevent an emphasis on capital preservation that was criticised in the consultation paper.
  • Tax reliefs There were no changes to the levels of tax reliefs given to VCTs and EISs. The main rate of income tax relief for subscriptions remains at 30%. The relief can be clawed back if the investment is sold prematurely or ceases to qualify, with clawback periods remaining at five years for VCTs and three years for EISs. Similarly, the capital gains tax advantages of VCTs and EISs were left intact.

These reforms and other technical changes have added greater risk to VCT and EIS investment, making it more vital than ever to take expert advice before committing your capital to such schemes.

The value of your investment can go down as well as up and you may not get back the full amount you invested.

Past performance is not a reliable indicator of future performance.

Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

Levels and bases of taxation and tax reliefs are subject to change and their value depends on individual circumstances.

The Financial Conduct Authority does not regulate tax advice.

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