For anyone thinking about investing in the venture capital trusts market, specifically Venture Capital Trusts (VCTs) and the Enterprise Investment Scheme (EIS), or if you are already an investor, its worth keeping an eye on the latest Government review of the market.
In previous VCT and EIS posts, we have outlined the appealing tax incentives available to investors in the venture capital trust market.
A Treasury inquiry is currently seeking evidence on options for change and gives an opportunity to make the tax rules less complex.
About the inquiry
The inquiry consultation, which is open until 7 June, asks for feedback on the operation and effectiveness of the venture capital market, including the possibility of changing the current tax incentives.
It focuses on the current state of the UK venture capital industry, the operation and effectiveness of the various regulatory regimes governing the industry and the effectiveness of current venture capital policies in meeting wider government objectives.
One of these objectives is ‘levelling-up’, for the UK to be a science and technology “superpower” and delivering on the net zero emissions target.
Contribution of venture capital backed business
For those involved in the venture capital industry the inquiry will give a focus on the contribution that venture capital backed businesses make to the UK economy.
In the UK in 2021 a study said that joint private equity and venture capital backed businesses employed 1.9 million workers, collectively earning £58 billion (Ernst & Young).
EIS and SEIS tax conditions
EIS tax relief helps investment in start-up companies. Where certain conditions are met, income tax relief of 30% is available for those individuals investing in qualifying companies, on the amount invested up to £1 million in any tax year.
Gains on any increase in value of those shares are tax exempt provided the individual holds the shares for more than three years. Although offering attractive tax incentives for investment in start-ups, the conditions are quite complex.
The Seed Enterprise Investment Scheme (SEIS) is an option with qualifying conditions based very closely on the EIS but the maximum amount of investment qualifying for SEIS relief is only £100,000 a year.
In some circumstances, qualifying investors will be able to claim income tax relief of 50% of the cost of buying shares in the company. Qualifying SEIS investors are also exempt from paying tax on gains on SEIS shares and benefit from a 50% exemption from tax on gains reinvested into SEIS shares.
Venture capital trust investments provide an opportunity to access companies that are often hard to invest in and to potentially benefit from the outsized returns they can deliver, while also helping to drive economic growth, create jobs and be a long-term benefit to the UK economy.
We await the outcome of the Treasure inquiry and its affect on venture capital trust market investment.
For further financial advice on venture capital trust investment contact us via the form here.