Adrian Walton looks at how EIS and VCTs can help
businesses attract capital from private individuals.
Enterprise investment scheme
Under EIS individuals invest directly in your company, as it can
offer significant income tax, inheritance tax and capital gains tax
reliefs to passive investors and, in certain cases, to
owner-manager shareholders in many trading businesses.
For individuals who are UK resident for tax purposes (or have a
UK income tax liability) these tax benefits include:
income tax relief equal to 30% of amounts subscribed for
eligible shares (for shares issued after 5 April 2011)
ability to dispose of shares after three years free from CGT
(currently a 28% saving only available if EIS income tax relief is
ability to defer the CGT payable on other chargeable gains by
investing the gain in an EIS qualifying company (representing a
cash flow advantage plus the potential for actual tax
Venture capital trusts
VCTs are fully listed companies which encourage investment in
small and medium-sized unquoted trading companies. Individuals
invest in VCTs whose managers, in turn, invest in a portfolio of
securities, mainly represented by shares and loan stock in unquoted
trading companies. There are significant income tax and capital
gains tax benefits available to investors, but only if the VCT
retains its qualifying status. To achieve this, a VCT must have at
least 70% of its investments represented by shares or securities in
Thus, VCT managers are continually looking to invest in suitable
unquoted trading companies as part of their portfolio. In recent
years, as a result of enhanced income tax benefits being available
to investors, there have been significant funds available to VCT
managers to invest. As each VCT can invest a maximum of £1m
per year in each of its portfolio companies, usually through a mix
of debt and equity, this is potentially a good source of venture
capital for investee companies.
How to qualify for EIS and VCT investment
The company must be unquoted at the time of the investment
(there are special rules about subsequent listing). AIM companies
count as unquoted for EIS and VCT purposes.
The company's (or group's if applicable) gross asset
value must not exceed £7m immediately before investment and
£8m immediately after (these limits are being increased for
shares issued after 5 April 2011)
The company, or a qualifying subsidiary, must be trading wholly
or mainly in the UK. The Finance Bill No 2 2010 contained
provisions whereby this condition will be replaced by one requiring
that the issuing company only has to have a permanent establishment
in the UK. The operative date for the new rules will relate to
shares issued on or after 6 April 2011.
There is a limit of 50 full-time employees in qualifying
companies (or a group if applicable) at the time of the relevant
investment (this limit is being increased for shares issued after 5
A number of trades are specifically excluded from the scheme,
such as property development, certain financial services, farming
The company must not be under the control of another company
and is restricted to how it holds shares in subsidiaries.
The aggregate amount of qualifying funds that can be raised by
any one company under these schemes must not exceed £2m in
any 12-month period (this limit is being increased for shares
issued after 5 April 2011).
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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