New equity funding rules may favour co-investment

By Adrian Walton, Tax Director at Smith & Williamson

Getting funding is never easy, especially in these cash-strapped times. But the recent changes to the rules on Venture Capital Trusts (VCTs) and the Enterprise Investment Scheme (EIS) could spell good news for businesses wishing to spur their growth.

VCTs are tax-favoured, quoted investments that provide funding to qualifying trading businesses. EIS applies to similar types of investment but through an unquoted structure, with investors acquiring shares in individual businesses or through specialist EIS funds.

From 6 April 2012, the annual limit on the aggregate of VCT and EIS funding for qualifying businesses will rise from £2m to £10m. This will give individuals the chance to invest alongside VCTs and other investors in much larger fundraisings through the EIS, whilst still offering significant tax breaks.

As well as an increase in the annual investment limit, the number of full-time employees in a qualifying business will rise from 50 to 250. Moreover, investors will be able to invest in businesses with maximum gross assets of £15m, up from the current level of £7m.

Individuals can invest up to £200,000 per tax year in a VCT and benefit from 30% income tax relief, with a minimum holding period of five years. Dividends are tax-free, subject only to the loss of the dividend tax credit, and there is no capital gains tax (CGT) if the VCT is sold.

Investors in an EIS can gain income tax relief of 30% on any qualifying investments made and gains are free from CGT with a minimum three-year holding period. Investments of up to £500,000 can be made on an annual basis, with this limit increasing to £1m in April 2012. EIS investors can also benefit from CGT deferral on the sale of other assets.

As a result of these changes, VCT and EIS investments may become more mainstream. Whilst they are not without risk, the forthcoming changes will make this tax-favoured asset class much more attractive for many.

To discuss the new tax rules relating to VCT or EIS funding, speak to Adrian Walton on 020 7131 4180 or email: adrian.walton@smith.williamson.co.uk

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By necessity, this article can only provide a short overview and it is essential to seek professional advice before applying its contents. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
Smith & Williamson Limited
Regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities. A member of Nexia International.

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