Enterprise Investment Schemes and Venture Capital Trusts are UK structures bringing large tax benefits. With the political calendar turning towards finance and tax, practitioners are cranking up the volume.

With the UK government’s autumn budget date of 22 November less than a month away, it’s unsurprising perhaps that those investment vehicles benefiting from certain tax incentives are starting to make a noise.

Enterprise Investment Schemes and Venture Capital Trusts have been around for more than two decades, their tax incentives surviving Labour, Conservative and coalition governments. Their financing of small, relatively risky start-ups and innovative firms explains part of that durability. Even so, governments cannot resist a temptation to tinker, and UK finance minister Philip Hammond, part of a government under pressure to prove some radical zeal, may find it hard to leave EIS’s and VCTs alone.

EIS and VCT investments provide initial tax relief of 30 per cent, while VCTs pay tax-free dividend payments, a valuable feature for those requiring income and profits that are free of capital gains tax, the latter also being true of EIS investments. EIS investments are also free of inheritance tax after two years, provide loss relief so that the maximum loss on a single investment is 38.5 pence in the pound for a taxpayer paying the top income tax rate of 45 per cent, and allow for CGT deferral. With lifetime pension tax allowances reduced by recent governments, EIS’s have sometimes, for example, been seen as an alternative attractive tax-advantaged channel. 

Signs of nervousness on whether these tax breaks might draw the government’s glare came recently from Dr Ilian Iliev, managing director of EcoMachines Ventures. Writing in a personal capacity, Dr Iliev said that any “drastic” changes to the EIS scheme will damage finance for innovative UK business. “This would come at the worst moment, as UK start-ups already face challenges, as a result of reduced focus by EU VCs in UK deals, uncertainty around European Investment Bank support for UK VCs, and at any rate the UK financial systems’ lack of support for patient capital,” he said. 

“Remember the mid-2000s when early-stage VC funding in the UK disappeared? It was angel and private investors that eventually plugged that gap, and the EIS incentives played a key part in that. The ecosystem took 10 years to develop, yet any drastic changes can disrupt it significantly – at the wrong moment,” Dr Iliev continued. 

Meanwhile, in the VCT space, Calculus Capital, one of the prominent players in the space, said it had launched fundraising for its Calculus VCT, an entity aiming to deliver investors an annual dividend of 4.5 per cent, which translates to 6.1 per cent for investors receiving 30 per cent income tax relief, and capita growth. Proceeds from the fundraising will be used to invest in new companies and to provide additional funding to existing portfolio companies.

This VCT will invest alongside the Calculus Capital Enterprise Investment Scheme fund, it said. 

“VCT investment is a vital source of development and scale-up funding for many of the UK’s most promising smaller businesses, which are essential to the future of the UK economy,” John Glencross, chief executive, said.