January to March is the traditional EIS and VCT fundraising ‘season'. Matthew Brow, partner at RAM Capital Partners which markets the investments, gives a rundown of the New Year benefits on offer.
Shareholdings in EIS qualifying companies can be for up to £500,000 - £1m from April 2012. VCTs can be for up to £200,000. Both give tax relief to individuals investing in higher risk unquoted trading companies.
VCTs can be used as a pension supplement, to boost income and reduce income tax. EIS investments can be used as a tax mitigation tool to cut IHT, CGT and income tax.
Subject to likely European Commission approval, next year's New Year investors will benefit from a rise in the rate of income tax relief on EIS shares issued after 5 April 2011 from 20% to 30%, once the shares have been held three years.
VCTs also offer 30% income tax relief, but provided the assets have been held for five years.
Capital Gains Tax (CGT)
VCTs offer a CGT-free exit on disposal. EIS investors can get deferral relief on their investment and a CGT-free exit after three years, and any loss on disposal can be offset against income.
EIS investments which have been held for at least two years before death should, in most cases, be entirely free from IHT, due to the interaction with Business Property Relief.
What your clients should know
Can be illiquid despite being listed entities
Like investment trusts they trade at a discount to NAV
Share buyback polices; are they robust and adhered to?
Unquoted, so have no market for the shares
Higher risk than VCTs due to less diversification
Exit opportunities are harder to find
Other benefits are set to become available the following season, with size limits relaxed for eligible companies on shares issued after 5 April 2012.
The investee company must have fewer than 250 employees (currently 50 employees) for EIS and VCT, and no more than £15m gross assets (currently £7m).
The maximum amount an investee company can raise in a 12 month period will be £10m (currently £2m) for EIS and VCT, and the annual amount an investor can subscribe under the EIS will be £1m (currently £500,000).
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