IR20
9 March 1999
ENCOURAGEMENT FOR SERIAL ENTREPRENEURS AND OTHER INVESTORS IN
ENTERPRISE INVESTMENT SCHEME (EIS) COMPANIES
A new capital gains tax relief is to be introduced to encourage
serial entrepreneurs and other investors in EIS companies, announced
the Chancellor today. The new relief builds on last year's major
reform of capital gains tax. It will enhance serial EIS investment
by giving CGT taper relief cumulatively on a gain deferred from one
EIS investment to another. Entrepreneurs and 'business angel'
investors who do not qualify for exemption from capital gains tax on
EIS investments will be encouraged to reinvest the rewards from one
successful enterprise into another.
The new relief will apply where the shares in the first EIS company
were issued after 5 April 1998 and are disposed of after 5 April
1999.
Detailed changes will also be made to the EIS and to the provisions
for Venture Capital Trusts (VCTs) to ensure that they work as
intended.
DETAILS
The new relief
1. This measure encourages and rewards reinvestment from one EIS
company into another by offering more generous CGT taper relief for
serial investors.
2. Serial investors who defer a chargeable gain on the disposal of an
EIS investment by reinvesting it in new shares in another EIS company
will benefit from taper relief on a cumulative basis. The amount of
the deferred gain which becomes chargeable to tax when the shares in
the second EIS company are sold will be calculated for taper relief
purposes as though the holding period began when the shares in the
first company were acquired and ended when the shares in the second
company were sold.
3. The change will mean that taper relief will be given for the gain
on the first investment as though it had been owned throughout the
period during which the investor remains invested in EIS companies.
Any disincentive against moving from one EIS investment to another is
removed.
4. The rules which determine whether a gain on an EIS investment is
exempt are not altered by this new relief.
Other changes
5. Two smaller changes are also proposed, one to the EIS and one to
the VCT scheme.
6. The EIS rules are to be amended to ensure that, as originally
intended, where funds raised under the scheme are used by a
subsidiary of the company which issued the shares, at least 90 per
cent of the shares in that subsidiary must be owned by that company.
This change will take effect for shares issued on or after 6 April
1999.
7. The VCT rules are to be amended to ensure that, as intended,
relief from income tax on distributions made by VCTs will not be
available where an investor's main purpose in acquiring shares is the
avoidance of tax. This change takes effect for shares acquired on or
after Budget Day.
NOTES FOR EDITORS
EIS
1. The Enterprise Investment Scheme (EIS) is designed to help
higher-risk, trading companies raise start-up and expansion finance
by the issue of ordinary shares to individual investors previously
unconnected with the company. Qualifying investors may claim various
income tax and capital gains tax reliefs, in particular:
- income tax relief (at 20 per cent) on the amount invested (up
to an annual limit) and, where income tax relief has been
obtained, relief from capital gains tax on disposal of the
shares, provided they are held for at least five years;
- relief for any allowable losses on the shares against either
taxable income or chargeable gains; and
- deferral of capital gains tax on a chargeable gain from the
disposal of an asset where the gain is reinvested in new
shares.
2. To qualify as an EIS company, a company has to satisfy a number of
conditions. In particular, it has to exist for the purpose of
carrying on a qualifying trade, or be the parent company of a trading
group. Most trades qualify, but there are a number of exceptions,
including banking, insurance and other financial activities.
3. 'Business angel' investors are outside investors, previously
unconnected with a company, who wish to invest in that company and
may be able to provide managerial, financial or entrepreneurial
expertise.
CGT Taper relief
4. Taper relief was introduced last year. It reduces the amount of a
chargeable gain according to how long an asset has been held after 5
April 1998. There is a more generous taper for business assets than
for non-business assets, and holdings of shares in a qualifying
company in which an individual's voting rights exceed certain
thresholds qualify as business assets.
5. Where the charge on the capital gain on the sale of EIS shares is
deferred under the existing EIS reliefs, taper relief is presently
calculated by reference to the period that those shares have been
held. This change will mean that taper relief for the deferred gain
will be calculated over the combined period for which the first and
second investment (and further investments if the gain is further
deferred) are held.
Venture Capital Trusts
6. VCTs are companies listed on the Stock Exchange which specialise
in investing in small higher-risk trading companies of the same kind
as those which qualify under the EIS. By investing in a VCT, the
individual investor is able to spread the risk over a number of such
qualifying companies. The investor is entitled to various income tax
and capital gains tax reliefs, including:
- income tax relief (at 20 per cent) on the amount invested in
new VCT shares up to an annual limit of #100,000;
- deferral of capital gains tax on a chargeable gain from the
disposal of an asset where the gain is invested in new VCT
shares;
- exemption from capital gains tax on the disposal of ordinary
shares in VCTs, whether or not they were new shares when
acquired;
- exemption from income tax on dividends paid by VCTs.
Exchequer costs
7. The changes are estimated to have a negligible cost in the early
years.
INLAND REVENUE PRESS OFFICE
Media enquiries to: 0171 438 6692/6706/7327
(Out of hours: 0860 359544)
Non media enquiries to: 0171 438 6420/6425
Inland Revenue information is on the Internet:
www.inlandrevenue.gov.uk
# = pounds sterling