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New risk criteria for venture capital schemes

Important changes for venture capital schemes and enterprise investment have recently come into effect.

New ‘risk-to-capital’ conditions apply to investments in venture capital trusts (VCTs), enterprise investment schemes (EISs) and seed enterprise investment schemes (SEISs). The changes took effect on 15 March 2018, when the Finance Act 2018 received Royal Assent.

Broadly speaking, an EIS or SEIS company, or a company in which a VCT is investing must both:

1. Have objectives “to grow and develop its trade in the long term”.

2. Carry a “significant risk that there will be a loss of capital of an amount greater than the net investment return”.  

The changes are intended to end venture capital schemes – particularly EISs – which often did little more than return the investor’s original capital at the end of the tax relief clawback period. Such schemes were usually asset-backed, typically focusing on pubs, ship ownership/chartering or film production, where pre-sales were in place.

For many years the Treasury tried to exclude such ‘safe’ trades, only for other low-risk options to emerge. The new risk-to-capital condition, and its somewhat subjective criteria, is designed to put an end to this cycle.

The minimum percentage of ‘qualifying holdings’ (risk investments in small unlisted companies) for a VCT has also increased from 70% to 80%. This, along with other measures in the Act, aim to increase the level of risk undertaken in such schemes.

The Chancellor has also issued a consultation paper on a new form of EIS fund aimed at knowledge-intensive companies. The document suggests possible restructuring of the EIS tax incentives, with a greater backdating period and/or tax-free dividends after a minimum period.

The VCT, EIS and SEIS offerings in 2018/19 are likely to differ from earlier years. They may also be thin on the ground as promoters acclimatise to the new higher-risk regime and digest the heavy flow of fresh capital in 2017/18.

More than ever, if you want to invest in this area, expert advice will be vital.

The value of your investment can go down as well as up and you may not get back the full amount you invested.

Past performance is not a reliable indicator of future performance.

Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.

The value of tax reliefs depends on your individual circumstances.

Tax laws can change.

The Financial Conduct Authority does not regulate tax advice.