Background
The Enterprise Investment Scheme (“EIS”) and Venture Capital Trust (“VCT”) are share schemes approved by HM Revenue & Customs (HMRC) with beneficial tax advantages for individuals investing in small and medium-sized companies.
There are a number of conditions that must be met in order for an investment to qualify for tax relief. One of these conditions is that the shares in the company (for EIS relief) or in the VCT are issued before a date specified in the legislation – often referred to as the ‘sunset date’. The reliefs were due to expire at 6 April 2025 but have now been extended for a further 10 years until 5 April 2035.
Detail
The tax reliefs for start-ups and entrepreneurs investing under EIS or VCT have a sunset clause and new legislation was required to extend the reliefs beyond the previous expire date of April 2025. Following the recent passing of the Finance Act 2024, both schemes will now run until 5 April 2023.
The scheme are designed to encourage investment into new or young companies through tax relief incentives, encouraging innovation, creating jobs and stimulating the economic growth. Both schemes offer incentives to investors of up to 30% income tax relief on their investment and an exemption from capital gains tax (CGT) on any profit made from a subsequent sale of the shares.
Under EIS an individual can invest up to £1 million in new shares in qualifying companies in a tax year, or up to £2m in knowledge-intensive companies which focus on research and development. The shares must be held for a minimum of 3 years in order to qualify for the exemption from CGT and retain any income tax relief claimed.
VCTs are companies listed on the UK’s stock exchange that invest in early-stage trading companies on behalf of investors, and enable an individual to invest up to £200,000 per year on new VCT shares with any dividends received being tax free. Shares in a VCT must be retained for 5 years in order to avoid losing the income tax relief claimed on those shares.
The above only represents a brief overview of the tax advantages available and the conditions that must be satisfied in order to qualify for these share schemes.
If you would like more information on the EIS or VCT schemes and the tax reliefs available as an investor or if you are a company looking at ways to raise investment, please speak to our Tax Director, Jenny Marks.
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