UK investment schemes get green light from European Commission

The European Commission has approved the UK government's extension of the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs) until April 2035.

These schemes help small, high-growth businesses secure funding. Approval came under the UK's new Subsidy Control Regime, which replaced EU State Aid rules after Brexit. The decision follows a review by the UK government, which found the schemes essential for supporting start-ups and growing businesses, especially given recent economic challenges. 

The European Commission found no issues with the schemes, stating they comply with internal market rules. Industry stakeholders welcomed the approval, as it ensures continued support for businesses that struggle to find financing elsewhere. 

The effectiveness of EIS and VCTs was evaluated via a survey in 2022, which showed that over half (57%) of EIS investors said the tax incentive was one of the most important reasons they invested through the scheme, and nine in ten (89%) VCT investors said they were one of the most important reasons for investing in a VCT. 

The research confirmed that, without the tax incentives, investors would withdraw some or all of their investment in the targeted companies, leading to a reduction in funding for these businesses. 

Benefits of EISs and VCTs for investors

The government view this type of investing as a key way to support the development of businesses as they grow but recognise that it can carry additional risks in comparison to investing in a traditional Unit Trust or Open-Ended Investment Company (OEIC). They, therefore, offer attractive tax benefits to individual investors willing to invest. 

These include the ability to: 

• Reduce your income tax liabilities 
• Defer payment of Capital Gains Tax (CGT)
• Reduce your taxable estate when you die (inheritance tax (IHT)) 

Adding these types of investments to a portfolio can also: 

• Provide high earners with the ability to build an alternative source of tax-efficient income in retirement and 
• Increase investment diversification. 

However, it is important to note that these investment opportunities are only suitable for people who are experienced investors and have the capacity to absorb losses without their standard of living being significantly affected. 

With the next budget around the corner and speculation around potential changes to capital gains tax and inheritance tax, it will be interesting to see what place these kinds of investments have in financial planning post-budget.

If you would like to know more about these types of products please speak to your usual TPO Adviser or request a copy of our Alternative Investing Guide.

Please note: This article is intended for professional use only and should not be shared with clients. It is for general information only, does not constitute individual advice and should not be used to inform financial decisions. Investment returns are not guaranteed, and you may get back less than you originally invested. 

The Financial Conduct Authority (FCA) does not regulate tax advice. 

The information in this article is correct as at 24/09/2024

Source: https://www.techlink.co.uk/