In his Spring statement, Chancellor Philip Hammond announced that consideration was being given to introducing a new higher-risk variant of the Enterprise Investment Scheme (‘EIS’), to encourage investment in new “knowledge intensive” technology companies.
EIS was introduced in the 1990s and offers investors in companies that meet the criteria and have assets of less than £15 million a range of tax reliefs:
- 30% up-front income tax relief on investments up to £1 million p.a.
- Exemption from CGT on the disposal of shares in respect of which income tax relief has been granted, after these have been held for 3 years
- Deferral of capital gains tax (‘CGT’) on gains of unlimited amounts from other investments which have been realised within the previous 3 years and reinvested into the EIS
- If the business qualifies for Business Property Relief an EIS holding will, after two years, be exempt from inheritance tax.
The new EIS variant could offer four different forms of tax relief, including allowing gains made on the sale of property to be off-set against a CGT bill. This would be attractive to property investors because property gains are subject to CGT at the higher rate of 28%
Other possibilities being considered are the exemption from tax of dividends from qualifying EIS holdings and enabling the investor to decide when to apply income tax credits, which could be either in or before the year in which the EIS investment is made. Currently, tax relief applies when the EIS invests in the underlying company whether or not this suits the individual investor.
To be eligible for the proposed new benefits the EIS would have to be confined to investing in companies that commit significant expenditure to research and development at an early stage in their lives. Such companies would necessarily involve higher risk and longer time-spans in establishing their viability. Hence the adoption of the expression ‘patient capital’ in relation to such investments.
Britain has in fact become a world-leader in technology, ahead of all other countries with the exception of the US and China. In 2017 twice the amount of capital was raised in London to fund digital companies than any other city in Europe during the period 2012 to 2016 total investment in Britain amounted to £28 billion, equivalent to our closest rivals France, Germany and the Netherlands combined.
The Chancellor’s thinking reflects not only the importance of technological development to the future of the UK economy but also the government’s crack-down on investment schemes which it considers are based on an unfair manipulation of the tax laws.
This, combined with restrictions on the amounts that can be invested in pensions, is causing investors to favour not only EIS but also other less adventurous approved savings media such as ISAs and Venture Capital Trusts (VCTs).
VCTs offer 30% income tax relief on investments of up to £200,000 p.a. and tax-free dividends but are not confined to high-tech investments. However, the range of eligible companies is being pruned and will in future probably exclude pub chains and crematoria.