Jul 122013
 

Please note, this table and the commentary are out of date. A more up to date version which takes into account the new Social Enterprise Investment Scheme can be found here

There are three types of Venture Capital Scheme, each one with tax breaks to induce investors to part with their hard earned money. The following table is a summary of these tax breaks, together with the relevant statutory provision.

(Please note – the tax legislation changes rapidly, and the venture capital schemes are no exception. This table reflects the position at the time of writing, and takes into account forthcoming legislation in this year’s Finance Bill. The table shall be updated from time to time).

 (In case it is hard to read, you can find a bigger version of the table here.)

EIS and VCT Tax Breaks

A few comments on the above table.

The different levels of risk are reflected in the type of investment:

  • The Seed Enterprise Investment Scheme – is at the highest rung of the risk ladder. The word “seed” gives a clue – these are for companies still in the incubation stage. It can be thought of as a mini version of the next scheme which is:
  • The Enterprise Investment Scheme – still risky, but lower down the ladder from SEIS.

Both the last two schemes – which we shall call the Enterprise Schemes – involve investors sinking their capital in a single company. The next scheme mitigates the risk of putting all one’s eggs in one basket:

  • Venture Capital Trusts – a VCT is a corporate vehicle that invests in other growth companies. It can be thought of as an EIS fund in the sense that the companies making up the portfolio are of a similar type to those seeking EIS funding. Investors access these companies indirectly by buying shares in the VCT.

Although there are similarities between all three schemes, there are also important differences.

The SEIS scheme is temporary

That’s right. This isn’t normally mentioned in the financial press. Currently, there is a five year trial period which runs out on 5 April 2017. However, it is quite possible that this will be extended, or even made permanent1.

Upfront relief – Share subscription or second hand?

Both the Enterprise Schemes require the investor to subscribe for the shares and claim the upfront tax relief. This is necessary in order to access all the other tax reliefs, except the relief for inheritance tax.

VCTs on the other hand, don’t have this restriction. You still need to subscribe to claim upfront relief, but you don’t need to do this to access the dividend and CGT exemptions. These exemptions are available even if the shares have been bought second hand on the stock market.

In theory, one could claim upfront VCT relief, lose it, but still keep the other exemptions2. By contrast, with the Enterprise Schemes, losing the upfront relief means losing (nearly) all the others.

Dividend exemption

There is no dividend exemption for the Enterprise Schemes, only for VCTs. However, this doesn’t matter, given that the former types of investment are companies at an earlier stage of the business cycle – any earnings they do make are likely to be ploughed back into the business instead of being distributed to shareholders.

VCTs on the other hand are legally required to distribute at least 85% of their income to their shareholders3. So the dividend exemption makes sense. Note that this is not unrestricted. Investors buying up to £200,000 worth of shares in any tax year obtain the full benefit, but any extra shares are taxed in the normal way.

CGT reinvestment relief

This relief relates to capital gains incurred on other assets. It is possible to defer, or even extinguish the tax charge by applying the disposal proceeds to a venture capital investment. Only the Enterprise Schemes have this facility – VCTs used to have it, but it was abolished for the tax years 2004/05 onwards.

There are important differences between the two schemes which have this relief:

  • For EIS, the rolled over gain is deferred until such time that the EIS shares are disposed of. So, although the EIS shares themselves are exempt, this doesn’t exempt the gain on the other asset4;
  •  For SEIS,  only 50% of the gain can be sheltered – however, this part of the gain is potentially exempt if the investor holds on to his SIES shares for the relevant three year holding period5. There is a special case for gains occurring in the tax year 2012/13. In this case the entire amount can be sheltered in this way6.

Capital gains exemption

All three venture capital schemes have a CGT exemption. This would normally mean that capital losses are unallowable under general principles7.

However, for both the Enterprise Schemes, a capital loss can also be set against other capital gains. This is not the case for VCTs8.

Loss relief against income

Also known as share loss relief. A capital loss on the shares can be set against other income (as opposed to other capital gains). This is under the rules applying to holdings in unquoted trading companies9.

There is a quirk in the legislation. The rules make a distinction between:

  • EIS shares on the one hand – where the relief is made explicit10; and
  •  “All the others” are lumped together – the latter have their own conditions to satisfy11.

There is no explicit statement that SEIS shares qualify. In principle it should qualify under the “all the others” heading, since the further conditions to satisfy appear similar to those applying for SEIS companies. However, one should be wary. It is possible in theory, for an investment to satisfy the SEIS criteria but fall foul of one of the conditions mentioned in the share loss relief rules.

VCTs don’t qualify for share loss relief for a number of reasons. The share loss relief is mainly directed at investments in unquoted trading companies12 – VCTs do not satisfy this criteria. Not only are VCTs quoted, but they are in fact investment companies – their business consists of investing in trading companies, but they themselves do not trade.

Inheritance Tax

These reliefs are not specific to the venture capital schemes. They are a consequence of the rules on business property relief in the inheritance tax legislation.

The Enterprise Schemes qualify because they involve holding shares in unquoted trading companies. VCTs don’t qualify as they involve quoted securities – the only way anyone can get relief in this case is to control the whole company, which is highly unlikely13.

Conclusion

The above table and comments should provide a guide as to what the tax breaks are, and the differences between the various venture capital schemes.

However, one should note that the legislation does change quite frequently, and that therefore this can be no more than an overview –  for example, the limits of how much you can invest in the schemes seem to keep changing over the years. One should always check for the latest updates in the tax news.

Furthermore, the conditions attached to the various tax breaks are a lot more numerous and complicated than is set out in the table – one should always bear this in mind if you are in the business of advising on these schemes. Hopefully, the statutory references in this article should provide some clue as to where to go to in the legislation.


 

  1.  ITA 2007 ss 257A(3), (4).
  2. The exception to this is the case where upfront relief is lost due to the VCT losing its tax status– in which case all the reliefs go out the window.
  3.  ITA 2007 s 274(2).
  4.  TCGA 1992 s 150C, Schedule 5B, paragraphs 1, 2, 4.
  5. TCGA 1992 Schedule 5BB, paragraph 5 – note that the list of chargeable events upon which the original gain is triggered, does not list a sale of the SEIS shares. The only way for the gain to resurface is if SEIS relief is withdrawn or reduced – which would include a sale before the three year holding period is over. Contrast the position with EIS/SITR where the gain will always be triggered on a sale – EIS – TCGA 1992 Schedule 5B, paragraphs 3(1)(a), 3(1)(b); SEIS – TCGA 1992 Schedule 8B,  paragraphs 6(1)(a), 6(1)(b).
  6.  TCGA 1992 Schedule 5BB, paragraphs 1(5), 1(5A).
  7.  TCGA 1992 s 16(2).
  8. SEIS – TCGA 1992 s 150E(3); EIS – TCGA 1992 s 150A(2A); VCTs – TCGA 1992 s 151A(1).
  9.  ITA 2007 s 131.
  10.  ITA 2007 s 131(2)(a).
  11.  ITA 2007 s 131(2)(b).
  12. ITA 2007 ss 131(2)(b), 134(a)(i), 134(4)(b). By the phrase trading company we include a holding company of a trading group – ITA 2007 s 137(1)(b).
  13.  IHTA 1984 s 105(1)(cc).
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Satwaki Chanda

Satwaki Chanda

Satwaki Chanda is a tax lawyer with a First Class degree in Mathematics. Called to the Bar in 1992, he is the Editor of Tax Notes.
Satwaki Chanda

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  2 Responses to “Venture Capital Schemes – A Summary of the Tax Breaks”

  1. I hope you don’t mind me making a few comments:

    – there is nothing in either the EIS or the SEIS legislation which restricts investment to those over 18. Only the VCT legislation does this.
    – neither the EIS nor the SEIS legislation restricts investors to investing in one company.
    Probably the majority of EIS investment has investors investing in multiple companies via EIS funds or angel syndicates.
    – SEIS runs for 5 years to 2017, not 10 years.
    – VCT shares fail to qualify for share loss relief for a number of reasons, not just because they’re quoted. They would also fail on the size condition and on the trading condition. It’s useful to be clear on that because not all VCT shares have to be quoted but even those which are unquoted would still fail to qualify for share loss relief.

    Regards

    Kathryn

    • Thank you for your helpful comments Kathryn, especially pointing out the errors.

      A few points I’d like to make in reply:

      1. I am a bit surprised that the age limit applies only for VCTs and not the other schemes. Is this something to do with the fact that VCTs are quoted, and you have to be over 18 to have an account with a stockbroker? Though I’m not sure how this would be insurmountable – a lot of investment trusts have share plans for “children” – the parent simply has to tick the box to say he’s acting as a trustee.

      I have to say that this sort of investment isn’t suitable for younger people. They don’t need it – if you’re starting young (which means a parent is investing for you), then you have time on your side, and don’t need the spectacular returns that is expected from the high growth sector.

      2. “Probably the majority of EIS investment has investors investing in multiple companies via EIS funds or angel syndicates.”

      Presumably this refers to more sophisticated investors, rather than retail investors? Or do the latter also invest in these syndicates?

      3. “VCT shares fail to qualify for share loss relief for a number of reasons, not just because they’re quoted.”

      Yes, quite right. VCTs themselves don’t trade, they are investment companies. Share loss relief is for investments in trading companies.

      I have in fact found a more fundamental reason why VCT investments can’t benefit. ITA 2007 s 131(1) requires that for the loss to be relieved against income, it must be a capital loss that is ALLOWABLE (emphasis added). But VCT losses are specifically UNallowable under TCGA 1992 s 151A(1). This follows normal tax rules – exempt the gain, deny the loss. Unlike the case for the other schemes SEIS and EIS where the loss is also allowed, even though the gain is exempt. If this weren’t the case, then even SEIS and EIS wouldn’t qualify for the share loss relief.

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