Patient capital review

This publication has on numerous occasions discussed ‘alternative’ tax efficient investments which, while higher risk investments, may appeal to those who are unable to make further pension contributions due to lifetime allowance restrictions, contributions limits, or in some cases both.

Investments of this nature will include Venture Capital Trusts, Enterprise Investment Schemes and Seed EIS 

All of these structures provide a capital injection to growing businesses, with the aim of helping them achieve further growth to ultimate benefit the economy.

To incentivise individuals to make investments, there are a variety of tax reliefs available which are outlined below:
 
  VCT

Enterprise Investment Scheme (EIS)

Seed Enterprise Investment Scheme (SEIS) 
Maximum investment  £200,000 £1m  £100,000 
Income tax relief  30% 30%  50% 
Carry back An individual can elect to carry back the investment to the previous year An individual can elect to carry back the investment to the previous tax year An individual can elect to carry back the investment to the previous tax year 
Minimum holding period to qualify for reliefs  5 years 3 years  3 years 
Capital Gains Tax relief  All gains free of CGT All gains free of CGT  All gains free of CGT 
Capital Gains Tax reinvestment relief/deferral  No Chargeable gains from 3 years prior to and one year after the investment can be deferred. These gains then become chargeable when the EIS matures, at the applicable rate of CGT at that time. A further EIS investment will continue to deter the gain.  50% of any chargeable gains reinvested into SEIS in the same tax year are immediately extinguished. The balance of the chargeable gain is paid at marginal rate. 
Income tax loss relief?  No If the SEIS fails, investors are able to claim loss relief at their marginal rate of income tax to the extent of their investment after taking account of the income tax relief originally received.  If the SEIS fails, investors are able to claim loss relief at their marginal rate of income tax to the extent of their investment after taking account of the income tax relief originally received.  
Business property relief?  No Yes - after a period of 2 years. Meaning the SEIS is outside of an individual's estate for IHT purposes.  Yes - after a period of 2 years. Meaning SEIS is outside of an individual's estate for IHT purposes. 

USD It is important to understand that the minimum holding period is pivotal to the availability of tax reliefs on these investments.

EIS relief can be granted on issue of the shares but the qualifying trade must then commence within two years of the share issue date or the relief will be withdrawn. The three year holding period for EIS and SEIS actually commences when the trade commences which could mean the minimum holding period is closer to five years than three.

Tax reliefs can also be withdrawn if the structure of the underlying investment changes and no longer qualifies for EIS or SEIS reliefs or if the investments are disposed of before the end of the minimum holding period.

The Treasury launched a ‘Patient Capital Review’ in February of this year, with the objective of “strengthening the UK further as a place for growing innovative firms to obtain the long-term ‘patient’ finance that they need to scale up.”

We last saw changes in legislation in 2015 which prohibited both Management Buy Outs (MBOs) and investment into renewable energy which had become particularly popular due to the government sponsored incentives.

For VCT, EIS and SEIS, this latest review is likely to mean that investments into ‘lower risk’ structures, such as those where there is an element of asset backing to provide some form of downside protection to investors may not be allowable.

As with the previous change this is likely to mean investors are exposed to a greater degree of risk, albeit with a potential greater upside.

VCTs and EISs are highly illiquid investments, with investors potentially having difficulty in realising their investment at a given time. They should therefore only be considered as a long-term investment, i.e. over five years. They also carry the risk of potentially losing all or part of your capital investment and therefore the return of your capital is not guaranteed.
 
Personal financial planning, tax and investment strategies.

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