Inland Revenue 13
17 March 1998
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TAX INCENTIVES FOR VENTURE CAPITAL
The Chancellor today announced proposals for more generous and
better targeted incentives to promote investment and
enterprise. The Enterprise Investment Scheme and capital
gains tax reinvestment relief are to be rationalised to
create a unified scheme which preserves the best of both.
The changes, which take effect from 6 April 1998, will include
an increase of 50 per cent to 150,000 pounds per year in the
amount an individual can invest in new shares with the
benefit of income tax relief. Investors will be able to
defer substantial chargeable gains by investing in qualifying
companies whether or not they are able to qualify for income
tax relief under the scheme.
The new scheme will also benefit from measures, including
those announced at the time of the last Budget, which will
target the reliefs more effectively to provide venture
capital for trading companies. Some of these measures will
also apply for Venture Capital Trusts and other reliefs.
DETAILS
1. The Enterprise Investment Scheme (EIS) and capital gains
tax reinvestment relief are to be rationalised to create a
new unified scheme. This new EIS will encourage investment
in new shares in qualifying trading companies. Income tax
relief and relief from tax on disposals will continue to be
available up to an increased limit for minority shareholders.
The conditions for deferral relief of capital gains invested
in qualifying companies will enable entrepreneur
owner/directors to benefit as well as other investors.
The new Enterprise Investment Scheme - features
2. For companies raising funds under the scheme the main
changes are:
abolition of the limit of 1 million pounds on the amount
that can be raised each year;
participation limited to companies with gross assets of
less than 10 million pounds before an investment and no
more than 11 million pounds after it.
3. For investors, the main new features of the scheme are:
an increase of 50 per cent to 150,000 pounds per year in the
amount an individual can invest in eligible shares with the
benefit of income tax relief and exemption from capital gains
tax on gains made after five years;
unlimited deferral relief from capital gains tax for
individuals (whether or not they qualify for income tax
relief) and trustees where chargeable gains on disposals
are invested in eligible shares;
an increase from 15,000 pounds to 25,000 pounds in the
amount an individual may invest in shares issued in the
first half of a tax year and qualify for income tax
relief for the previous year.
4. The new scheme is to take effect for eligible shares
issued on or after 6 April 1998.
Better targeting
5. Changes will be made to the scope of both the new EIS and
the Venture Capital Trust (VCT) scheme. Their purpose is to
sharpen the focus of the schemes and ensure that the funds
they raise are used to benefit activities which carry an
appropriate degree of risk and investors who share in that
risk. The changes are:
guaranteed loans and securities will no longer form part
of the fixed proportion of qualifying investments which
a VCT must hold if individual investors are to benefit
from the various available tax reliefs;
VCTs will be required to ensure that at least 10 per cent
of their total investment in any company is held in
ordinary, non-preferential shares.
These changes will apply to VCTs for accounting periods ending
on or after 2 July 1997, but not in respect of funds raised
by the issue of shares before 2 July 1997.
Investors will not qualify for EIS reliefs if certain
arrangements exist before or at the time of the issue of
shares. The arrangements concerned are those for:
- the disposal of shares in the company, or
- the disposal of the company's assets, or
- the ending of the company's trade, or
- a guarantee of the shareholders' investment.
This change will apply where shares are issued on or after 2
July 1997.
6. The following property-backed activities are to become
excluded activities under both the new EIS and the VCT
scheme:
farming and market gardening;
forestry and timber production;
property development;
operating or managing hotels or guest houses; and
operating or managing nursing or residential care homes.
The new exclusions will apply to the EIS for funds raised by
shares issued on or after today. For a VCT they will apply
on or after today in determining whether its investments
qualify, but will have no effect in relation to investment
funded by money raised before today.
Loss relief on investments in unquoted companies
7. Investment companies and individuals who invest in
qualifying shares in unquoted trading companies can, in
certain circumstances, set losses on the disposal of such
shares against their income for the purposes of corporation
tax or income tax.
8. The types of trading companies that can qualify for these
purposes will be brought into line with those that can
qualify for the purposes of the EIS and the VCT scheme. The
change will take effect where shares are issued on or after 6
April 1998.
Qualifying corporate bonds
9. Although gains from qualifying corporate bonds (QCBs) are
exempt from capital gains tax, relief can be given for an
allowable capital loss in certain circumstances. This
facility is little used, as most QCBs are held by companies
which can obtain relief against income under the loan
relationships regime. As part of the rationalisation of the
various reliefs, loss relief for QCBs will cease to be
available for loans made on or after today.
NOTES FOR EDITORS
Reinvestment relief
1. Reinvestment relief defers the charge to capital gains
tax where an individual or trustee makes a gain on the
disposal of any asset and invests all or part of the gain in
shares of qualifying unlisted trading companies. Liability
to capital gains tax on that gain is deferred until the
shares are disposed of or the conditions for relief are no
longer met.
2. An investor may invest without limit in a company,
whether he is an outside investor or not, and the relief may
apply to the acquisition of existing shares as well as new
shares (whereas the new EIS applies only to new shares). The
company has to exist for the purpose of carrying on a
qualifying trade or be the parent company of a trading group.
Most trades qualify, but there are a number of exceptions,
including banking, insurance and other financial activities.
The EIS
3. The EIS is designed to help higher-risk, unlisted trading
companies to raise start-up and expansion finance by the
issue of ordinary shares to individual investors previously
unconnected with that company. Qualifying investors may
claim various income tax and capital gains tax reliefs, in
particular:
income tax relief (at 20 per cent) on the amount invested
and relief from capital gains tax on disposal of the
shares, provided they are held for at least five years;
relief for any allowable losses on the shares against
either income or chargeable gains; and
deferral of capital gains tax on a chargeable gain from
the disposal of an asset where the gain is reinvested in
a subscription for shares on which income tax relief is
given.
4. The rules which determine whether a company can qualify
for the EIS are broadly the same as those which apply for
reinvestment relief.
The VCT scheme
5. The VCT scheme differs from reinvestment relief and the
EIS in that VCTs are companies listed on the Stock Exchange
which specialise in investing in higher-risk, unlisted
trading companies. By investing in a VCT, the individual
investor is able to spread the risk over a number of such
qualifying companies. Companies qualify for VCT purposes if
they can qualify for the EIS. The investor is entitled to
various income tax and capital gains tax reliefs, which
remain unchanged.
Qualifying corporate bonds
6. A qualifying corporate bond (QCB) is a type of debt
security issued by a company. Some corporate bonds give rise
to chargeable gains on disposal, but QCBs are exempt. The
qualifying conditions for a security to be a QCB depend upon
the status of the holder.
Exchequer costs
7. These changes are forecast to produce an income tax yield
of 5 million pounds in 1998-99, a negligible effect in
1999-2000, and a cost of 10 million pounds in 2000-01.
Better targeting of capital gains tax deferral relief will
have a negligible effect in 1998-99 and a yield of around 20
million pounds in 1999-2000 and 30 million pounds in 2000-01.
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