IR20 9 March 1999 ENCOURAGEMENT FOR SERIAL ENTREPRENEURS AND OTHER INVESTORS IN ENTERPRISE INVESTMENT SCHEME (EIS) COMPANIES A new capital gains tax relief is to be introduced to encourage serial entrepreneurs and other investors in EIS companies, announced the Chancellor today. The new relief builds on last year's major reform of capital gains tax. It will enhance serial EIS investment by giving CGT taper relief cumulatively on a gain deferred from one EIS investment to another. Entrepreneurs and 'business angel' investors who do not qualify for exemption from capital gains tax on EIS investments will be encouraged to reinvest the rewards from one successful enterprise into another. The new relief will apply where the shares in the first EIS company were issued after 5 April 1998 and are disposed of after 5 April 1999. Detailed changes will also be made to the EIS and to the provisions for Venture Capital Trusts (VCTs) to ensure that they work as intended. DETAILS The new relief 1. This measure encourages and rewards reinvestment from one EIS company into another by offering more generous CGT taper relief for serial investors. 2. Serial investors who defer a chargeable gain on the disposal of an EIS investment by reinvesting it in new shares in another EIS company will benefit from taper relief on a cumulative basis. The amount of the deferred gain which becomes chargeable to tax when the shares in the second EIS company are sold will be calculated for taper relief purposes as though the holding period began when the shares in the first company were acquired and ended when the shares in the second company were sold. 3. The change will mean that taper relief will be given for the gain on the first investment as though it had been owned throughout the period during which the investor remains invested in EIS companies. Any disincentive against moving from one EIS investment to another is removed. 4. The rules which determine whether a gain on an EIS investment is exempt are not altered by this new relief. Other changes 5. Two smaller changes are also proposed, one to the EIS and one to the VCT scheme. 6. The EIS rules are to be amended to ensure that, as originally intended, where funds raised under the scheme are used by a subsidiary of the company which issued the shares, at least 90 per cent of the shares in that subsidiary must be owned by that company. This change will take effect for shares issued on or after 6 April 1999. 7. The VCT rules are to be amended to ensure that, as intended, relief from income tax on distributions made by VCTs will not be available where an investor's main purpose in acquiring shares is the avoidance of tax. This change takes effect for shares acquired on or after Budget Day. NOTES FOR EDITORS EIS 1. The Enterprise Investment Scheme (EIS) is designed to help higher-risk, trading companies raise start-up and expansion finance by the issue of ordinary shares to individual investors previously unconnected with the 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 (up to an annual limit) and, where income tax relief has been obtained, 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 taxable 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 new shares. 2. To qualify as an EIS company, a company has to satisfy a number of conditions. In particular, it 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. 3. 'Business angel' investors are outside investors, previously unconnected with a company, who wish to invest in that company and may be able to provide managerial, financial or entrepreneurial expertise. CGT Taper relief 4. Taper relief was introduced last year. It reduces the amount of a chargeable gain according to how long an asset has been held after 5 April 1998. There is a more generous taper for business assets than for non-business assets, and holdings of shares in a qualifying company in which an individual's voting rights exceed certain thresholds qualify as business assets. 5. Where the charge on the capital gain on the sale of EIS shares is deferred under the existing EIS reliefs, taper relief is presently calculated by reference to the period that those shares have been held. This change will mean that taper relief for the deferred gain will be calculated over the combined period for which the first and second investment (and further investments if the gain is further deferred) are held. Venture Capital Trusts 6. VCTs are companies listed on the Stock Exchange which specialise in investing in small higher-risk trading companies of the same kind as those which qualify under the EIS. By investing in a VCT, the individual investor is able to spread the risk over a number of such qualifying companies. The investor is entitled to various income tax and capital gains tax reliefs, including: - income tax relief (at 20 per cent) on the amount invested in new VCT shares up to an annual limit of #100,000; - deferral of capital gains tax on a chargeable gain from the disposal of an asset where the gain is invested in new VCT shares; - exemption from capital gains tax on the disposal of ordinary shares in VCTs, whether or not they were new shares when acquired; - exemption from income tax on dividends paid by VCTs. Exchequer costs 7. The changes are estimated to have a negligible cost in the early years. INLAND REVENUE PRESS OFFICE Media enquiries to: 0171 438 6692/6706/7327 (Out of hours: 0860 359544) Non media enquiries to: 0171 438 6420/6425 Inland Revenue information is on the Internet: www.inlandrevenue.gov.uk # = pounds sterling