22 November 2017

Autumn Budget 2017: Tax efficient investments

A summary of the key changes announced by the Chancellor during the Autumn Budget 2017 in relation to tax efficient investments.

Tax relief on high-risk investments

The Government is keen to encourage investment in innovative businesses, as indicated by the proposed changes to the Enterprise Investment Scheme (EIS).

Individuals investing in EIS companies can deduct 30% of the value of their investment from their income tax bill. From 6 April 2018, the annual investment cap for individuals investing in EIS will increase to £2 million, provided at least £1 million is invested in Knowledge Intensive Companies (KICs). The current individual investment cap of £1 million will continue to apply for investments in other EIS (non-KIC) companies.

The Chancellor also doubled the amount KICs can raise annually from £5 million to £10 million. However, the current lifetime limit for a KIC will remain at £20 million. Another Budget change will increase the time allowed for KICs to raise capital. Currently, EIS relief is not available for investments in KICs that have been trading for more than 10 years. From 6 April 2018, the 10-year clock will start from the date when the annual turnover exceeds £200,000, instead of the first commercial sale by the KIC.

As part of a tightening of the rules a new ‘risk to capital’ principles-based test will only allow EIS investment in companies aiming to grow and develop. Further, the investment must not be low-risk. This means that asset or property-backed companies, where the returns are almost certain or will outweigh the investment from the outset, may not qualify for EIS. HMRC will take a ‘reasonable’ view and apply a ‘rounded’ approach as to whether an investment has been structured to provide a low-risk return for investors. However, HMRC will cease to provide advance assurance on investments that appear not to meet this condition. This is likely to create uncertainty for investors and companies.

Under existing rules the relief for Venture Capital Trusts (VCTs) is withdrawn if an investor sells shares in a VCT and purchases new shares in the same VCT within a six-month period. This rule is being relaxed in certain cases involving mergers of VCTs.

Finally, from 1 December 2017, all EIS and VCT investments in a company (including investments received before 2012) will be considered as part of a company’s lifetime limit. 

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