Enterprise investment scheme and Venture capital trusts
Written by Ray Coman
Income tax relief limits effective 2014/15 are as follows:
|Annual Investment limits||1,000,000||100,000||200,000||1,000,000|
|Income tax relief rates||30%||50%||30%||30%|
|Are dividends taxable?||Yes||Yes||No||No|
|Capital gains tax exempt||Yes||Yes||Yes||Yes|
|Minimum holding period to prevent capital gains tax clawback||3 years||3 years||N/a||3 years|
|Minimum holding period to prevent income tax clawback||3 years||3 years||5 years||3 years|
|>Income tax relief for capital losses||Yes||Yes||No||Yes|
|Business property relief for inheritance tax purposes||Yes||Yes||No||Yes|
|Capital gains tax deferral||Yes||Yes||No||Yes|
Investors into shares which are within the enterprise investment scheme (EIS) obtain a reduction in income tax equal 30% of their investment (subject to the maximum state above.) The tax relief cannot exceed the investor's tax liability. The minimum investment is £500.
EIS relief is available where an individual subscribes wholly in cash for new, fully paid up ordinary shares in a qualifying company. Broadly a qualifying company is an unquoted trading company, with assets less than £15 million before the share issue an less than £16 after the share issue.
For the purpose of obtain EIS relief, the activity of certain trades are not considered to be trading, such as: property development, financial activities, share or property dealing, investment, hotel management, farming, legal and accountancy services.
A qualifying investor cannot:
- Be an employee or partner.
- Be a director, unless receiving only a reasonable remuneration
- A person who with associates hold more than 30% of the ordinary shares. An associate has the meaning of spouse, lineal descendant or ancestor. For instance, if the company is majority owned by one person, then this person's grandparent would not qualify but a sibling would be a qualifying investor.
EIS relief will be withdrawn if the investor sells his shares within 3 years following the date of their issue.
The usual EIS investment lmit is £1 million. However, a maximum of £2 million for "knowledge-intensive" companies.
The Seed Enterprise Investment Scheme, often abbreviated to SEIS, is designed for investors into businesses of the smallest size. The qualifying criteria for invstor and investee are similar to those fo EIS. However, the qualifying company cannot raise more than £150,000 from SEED and must have assets of less than £200,000.
An individual who subscribes for new, eligible shares in a Venture Capital Trust (VCT) is entitled to claim a tax reduction which is the lower of 30% of the amount subscribed for eligible shares in VCTs in the year (up to the yearly maximum state above), and the individual's tax liability for the year.
Dividends are tax exempt on the first £200,000 invested in VCT each year.
If the VCT shares are disposed of within five years of their issue, relief is withdrawn.
The VCT must be a listed fund which distributes at least 85% of its income. At least 70% of its investments must be in qualifying companies. Broadly, qualifying companies are unquoted, UK trading companies with assets of less than £7million.
The tax reducers for subscriptions into EIS shares and VCTs can reduce a tax liability to nil, but they cannot create a repayment.
Social investment tax relief applies to investment in community interest companies, charities and other organisations with a specific benefit to society. The investment liimit is £1 milion. however, up to £1.5 million can be invested for enterprises up to 7 years old.