It's been a long haul through the tax season this year, but I'm delighted to confirm that our Longbow VCT reached it's minimum and is in the process of alloting shares for the 2010/11 tax year. Likewise our Approved EIS fund has succesfully raised money and will have closes on 5th and 6th April - dependng on which tax year income tax relief is being sought.

It certainly didn't help having the Budget on 23rd March with press speculation that there would be changes to the EIS and VCT rules. Some journalists went so far as to speculate that any gain in EIS would be paid for by a reduction in VCT. Thankfully the changes, as I reported in my preceeding blog, were entirely supportive to VCTs and EIS.

As we turn into the new tax year we have a number of initiatives underway:

1.  We have seen a steady rise in interest in the VCT post 5th April as an pension investment. This is because the amount that an investor can put in their SIPP, and receive tax relief for has plummeted from 200k to 50k. As a consequence, making an investment into a growth-based VCT is an attractive way of gaining tax relief and tax free income as part of overall pension planning.

2.  The increase in income tax relief available to an EIS investor which is now set at 30%, up 10% from its previous level of 20% has increased interest in EIS as a tax efficient investment. Our Longbow EIS Arrowhead fund is a permanently open, or evergreen fund, designed to provide advisers and investors with a means to begin CGT deferral or IHT planning immediately, and not have to wait to the tax-year end to make an EIS investment.   

3.  More generally the interest in making venture investments is increasing as a raft of government measures are being put in place to offer support and encouragment to smaller businesses. Our chairman is heading up the new Business Growth Fund which has been widely reported and proposes to offer support to businesses with revenue around 10m pa.

I look forward to an exciting few months as we continue to build our funds and invest in life enhancement companies.

Julian

The Budget has put VCTs and EIS back where they belong and that’s at the heart of enabling private investors to get behind British innovation and allow more companies – not just start-ups -  to benefit from tax-efficient investment. Pre-Budget fears that the Chancellor would turn his back on VCTs and EIS have proved unfounded. This Budget shows the Government is seriously committed to VCTs and EISs that genuinely support British enterprise.

EIS investments will become really attractive to investors as a result of the Chancellor’s changes. Income tax relief has now been raised to be in line with VCTs, with the amount of upfront income tax relief increasing from 20% to 30%. And the amount of investment that can attract upfront tax relief will double in 2012 from £500,000 to £1 million.

The Chancellor has dealt a very generous hand to British companies involved in creating wealth through innovation. The number of businesses that will be able to benefit from EIS and VCTs will increase dramatically as a result of today’s Budget. Under existing rules, companies with no more than 50 employees and who met a £7 million pre-money gross asset test could qualify for VCT and EIS relief. But from April 2012, this will now increase to 250 employees, with gross assets to £15m. In addition, companies will also be to take up to £10m investment a year.

But the Chancellor has also fired a warning shot at companies that are operating outside the original intention of the schemes. He has indicated that over the next twelve months we will see rules emerge that will re-focus both EIS and VCTs to ensure they are targeted at genuine risk capital investments, which means the VCTs and EIS that have not invested in British-based innovation are likely to cease to exist.

Taken together, these announcements are to be welcomed. They are very good news for investors, for British businesses and the economy as whole. 

Julian

There has been a lot of speculation on whether we will see any significant changes to the rules surrounding VCTs or EISs in next week's Budget. Are VCTs about to disappear? Or perhaps change beyond recognition?

I think we will see that next week's Coalition Budget will strengthen support for these tax efficient vehicles. However, it will come with one crucial proviso - and that is that VCTs and EISs must invest more effectively into genuine venture companies. The detail will be revealed on the day, but I would suggest that tax reliefs will be enhanced and that the rules on what a VCT can invest into will be tightened. The thinking behind this is to ensure more of the money raised by VCTs and EISs actually goes to support innovative and exciting companies that will deliver strong growth to the British economy.

The background to why these changes may come isn't hard to find. It revolves around the fact that investment into real venture companies has fallen steeply over the last few years. Investment in venture capital in 2008 was £1.30bn. But within 12 months it had fallen by 48% to just £666m. Yet this was in the face of a steep increase in money raised by VCT and EIS funds. Both George Osborne and David Cameron have made speeches in the last few weeks in which they have clearly stated we need to support innovation in order to drive the economy forward. NESTA, the National Endowment for Economics, Science, Technology and the Arts reported in January that supporting high technology and innovation would be the fastest way to aid an economic recovery in this country. Small wonder then that the government is looking at ways to make this happen. 

Which brings me back to VCTs and EISs and the deduction that the government needs to do something to make them more attractive to investors. Then make sure that enough of the money raised is going to companies that need it. 

To return to the original question - are VCTs about to disappear? I don't think so. The VCT is the primary vehicle for investors to support British innovation and right now, investors and the economy need more, not less of this.

Julian     

We have had a number of requests in recent days from advisers and investors asking about the tax breaks available to investors in a VCT. I thought it might be helpful if I ran through the main elements of income tax and capital gains tax relief available in a VCT.

Income tax

Relief on subscription

An investor subscribing for shares in a VCT will be entitled to claim income tax relief on amounts subscribed up to a maximum of £200,000 in any tax year. The relief is given at the rate of up to 30%  on the amount subscribed, subject to an amount which reduces the investor’s income tax liability to nil. Relief may not be available where the investment is used as security for, or financed by, a loan.

Dividend relief

An investor who acquires, in any tax year, VCT shares up to a maximum of £200,000 will not be liable to income tax on dividends paid by the VCT on those shares whilst the Company qualifies as a VCT.

Withdrawal of relief

All or some of the income tax relief on subscription for shares in a VCT is withdrawn if the shares are disposed of (other than between spouses) within five years of issue or if the VCT loses its approval within this period.

Capital gains tax

Relief from capital gains tax on the disposal of shares

Any gains made on VCT shares are not subject to capital gains tax. Similarly, any losses on shares held in a VCT will not be treated as an allowable loss. Both of the above apply to the extent that the shares have been acquired within the limit of £200,000 for any tax year.

Purchasers in the market

An individual purchaser of existing shares in the market will be entitled to claim relief from capital gains tax on disposal (as described above) while the Company is still a VCT.

Withdrawal of relief

If a VCT which has been granted approval subsequently fails to comply with the conditions for approval, any gains on the shares after the date on which loss of VCT status takes effect will be taxable. Where VCT status is treated as never having been given, all gains are taxable.

Obtaining tax reliefs

Income tax relief

The VCT will issue each investor with a certificate which should be used to claim the income tax relief, either by obtaining from HMRC an adjustment to his/her tax coding under the PAYE system, or by waiting until the end of the tax year and using his/her Self Assessment Tax Return to claim relief.

Investors not resident in the UK

Investors not resident in the UK should seek their own professional advice as to the consequences of making an investment in a VCT as they may be subject to tax in other jurisdictions as well as in the UK.

Loans and VCT reliefs

VCT reliefs may not be available if the investor takes out a loan specifically to subscribe in the VCT.

If you have any questions relating to tax relief in VCTs, or any other aspects of VCT investing, please do let me know. 

Julian 

0207 332 5664 or jhickman@longbow.co.uk

Budget Update

The budget statement this week regarding EIS and VCT was very straightforward, with little that was new. However, it could have been much worse.

Although CGT has gone up, nearly all other reliefs have been preserved. This is particularly helpful for investors looking to reduce inheritance tax (IHT) liability and to make allocations to venture within their pension.

With the immediate rise in CGT rate to 28%, we anticipate a swift increase in interest in the Enterprise Investment Scheme as the higher CGT rate now enhances the value of investing under EIS. Investors will be keen to know how they can defer their CGT bill, whilst at the same time contributing to driving innovative British companies forward with an investment that will be free of CGT. By combining 20% income tax relief with 28% CGT deferral relief, investors can now make a tax saving of up to 48p for every £1 invested. Furthermore, once the investment has been held for 2 years it qualifies for 100% BPR, effectively delivering a further 40p of tax relief for every £1 invested in IHT relief.

The coalition Government has acknowledged the need to reduce the structural deficits through raising tax rates on individuals. However it has at the same time, determined measures to help stimulate economic growth and reduce the tax burden on businesses. This should act as the main driver to improve the longer term economic prospects of the UK economy.

Julian Hickman writes in this week's Professional Advisor:

"VCT and EIS funds offer a good route into enterprise investing and have the added attraction of offering tax relief, writes Julian Hickman, partner, Longbow Capital LLP.

Investing in early stage, dynamic, innovative British companies is something all investors should give serious consideration to. The life science, well being and healthcare sectors are typical examples of the British investment opportunities available.

However, not all openings are equal, and investors need to consider carefully how they can access such opportunities. One such way is to invest through Venture Capital Trusts (VCT) and Enterprise Investment Scheme (EIS) funds, both of which offer a range of tax reliefs for investing in innovation and reflect the risk and rewards available...." > Read More of Julian's article 'Reaping the rewards of British innovation at ifaonline.co.uk.

We are pleased to see that the Chancellor has made no material change to the Enterprise Investment Scheme. This is good news for advisers and their clients as EIS provides a powerful combination of tax reliefs for them as they look to reduce their tax burden.

And, with forthcoming increases in higher rate tax about to hit hard, investors need all the help they can get.

It is a shame that the Chancellor didn't take the opportunity to simplify the EIS structure, which is unnecessarily complicated. That is something we hope the next government might address as the current structure distracts investors from supporting enterprise and innovation.

A number of advisers have contacted us recently concerned that the budget on the 23rd March could contain changes to the EIS rules that might affect their clients' investment in our funds.

This is particularly relevant to advisers who have clients that have applied to invest in the 2010 Approved EIS Fund.

As soon as we know the detail of the budget we will discuss the changes, if any, to EIS reliefs with each adviser and how that may, or may not, affect their clients.

We can then confirm whether or not their client is invested in the right fund for them to maximise their EIS relief, and if we need to make changes, make sure they are undertaken in time for the tax year end.

We will also provide an update on our website for any changes that are announced to EIS relief in the days following the budget.

In the last few days we have been contacted by a number of investors keen to try and find some way of securing income tax relief for their 2008/09 earnings.

In 48 days it will become impossible to shelter this income from tax. Until 1 March, Longbow is keeping the Arrowhead EIS Fund open for investors who wish to shelter 2008/2009 earnings.

I am often amazed at how many misconceptions there are floating around the Financial Services industry regarding EIS (Enterprise Investment Scheme) investment. For many advisors these myths have caused them to avoid EIS, marginalizing it, often in preference for VCTs. Fortunately, over the last few years, with the help of advocates, such as Martin Churchill and the EISA, many of these myths have been dispelled. I have listed below three of the most common that I have heard mentioned over the years along with my own comments on ‘the facts;’ behind the myths.

Myth 1:

The first common myth surrounding the EIS investment is that it only provides investment into a single company, often a pub or similar asset-backed investment, whereas VCTs provide a spread of investments across multiple companies.

The Facts…

You can make an EIS investment into a single qualifying company if you wish, however, there are a number of EIS Funds and Portfolio Services which offer diversified investment portfolios focusing on growth while offering income tax, IHT and CGT relief.

Myth 2:

VCT tax breaks and performance are much better than that of EIS Funds

The Facts…

VCT do offer a better rate of income tax relief at 30%, however, EIS offers CGT deferral and relief, which VCTs do not. Also the holding period of a VCT is longer, at 5 years, in comparison to 3 years with EIS. VCTs can be useful as they usually pay part of their return as tax free income dividend, something not associated with an EIS investment, but with the complete set of tax breaks plus the shorter holding period, alongside a portfolio of strong investments EIS Funds can more than hold their own.

Myth 3:

As a specialist investment EIS funds and services are few in numbers and difficult to access.

The Facts…

There are a reasonable number of EIS Funds available on the market, some specializing in specific sectors

If you have any questions about the EIS scheme or EIS Funds please call me on 020 7332 0320 or email jhickman@longbow.co.uk.

For further information on EIS tax benefits please click here.