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BUDGET 2017: More generous EIS investment limit for ‘knowledge-intensive’ start-ups

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22/11/2017
Today’s Budget saw the Chancellor aim to encourage investment in technology using the tax-efficient Enterprise Investment Scheme.

Although detail remains light, Philip Hammond promised to double the annual £1m allowance for people investing in ‘knowledge-intensive’ companies through the Enterprise Investment Scheme (EIS). See YourMoney.com’s Enterprise Investment Scheme guide for more information.

He also said he would introduce a new test to ensure that the schemes were not being used for low-risk investments, or simply as a way to escape tax. He added these two measures would unlock over £7bn of growth investment.

EISs have favourable tax treatment, including 30% income tax relief, 40% inheritance tax (IHT) relief and up to 28% capital gains tax (CGT) deferral. This is designed to compensate investors for the risk of investing in higher risk, growing businesses.

Hugi Clarke, director at Foresight Group, said: “The Chancellor’s decision to remove low risk EIS is designed to refocus these investments away from ‘low risk’ structures and towards innovative companies with the opportunity for growth. EIS has been acknowledged as a key component in supporting these businesses as evidenced by the doubling of investment limits for technology based ‘knowledge-intensive’ companies.

“Importantly, the changes leave the unique tax advantages of this vehicle in place. An EIS remains attractive to those investors who can take advantage of the tax benefits and accept the associated risks…VCT inflows were up 100% against the same period last year while total fundraising is expected to exceed £800m this year, the sector’s highest ever.”

Helena Kanczula, corporate tax director at Blick Rothenberg, said: “Increase in the EIS investment limits for knowledge intensive companies is welcome news. As ever, the devil will be in the detail but properly targeted, this could encourage private investment in innovation.”

The Chancellor also tightened the rules around VCTs. It gave them double the time to reinvest gains (from investments from 6 to 12 months), but the new rules also require 30% of funds raised in an accounting period to be invested in qualifying holdings within 12 months after the end of the accounting period. It also increased the proportion of VCT funds that must be held in qualifying holdings from 70% to 80%.

Ian Sayers, chief executive of the Association of Investment Companies said: “The Chancellor has announced significant VCT rule changes and we need to consult with our VCT members, their managers and the Government to ensure that they are workable within the commercial reality of funding small businesses.

“The VCT industry faces significant challenges in complying with these rule changes but the industry has the benefit of highly experienced managers. These managers have adapted to changes in the past and continued to deliver good returns for shareholders.”

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