Sunset Clause - Extended
The Government’s announcement of the extension of the operation of the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCT) schemes from 6 April 2025 to 6 April 2035.
For a number of years, EIS income tax relief has been considered to be a form of State aid, and has needed to be notified to the European Commission. When EU State aid approval was last obtained for the EIS in 2015, it was a requirement that a "sunset clause” be included in the EIS legislation.
The sunset clause for EIS relief is provided by Section 157(1)(aa) Income Tax Act 2007, which stipulates that income tax relief is available for subscriptions for shares under the EIS prior to 6 April 2025.
However section 157(1A) goes on to say that “The Treasury may, by regulations, amend subsection (1)(aa) to substitute a different date for the date for the time being specified there”.
This gives the Government the power to extend the Sunset clause by secondary legislation beyond 5 April 2025.
Note that capital gains tax deferral relief available for investment in EIS companies is a separate tax relief from EIS income tax relief, and is not subject to a sunset clause.
There are similar provisions in the VCT legislation. These provide that VCT income tax relief is available for subscriptions of shares in VCTs before 6 April 2025, and also that regulations may be laid to substitute a different expiry date.
Note that the dividend relief and capital gains exemptions for VCT shares are not subject to a sunset clause.
Now that the UK has left the EU many of the State aid restrictions will cease to apply, and it was thought that the Government would choose to remove the EIS and VCT sunset clauses altogether.
And, on 23 September 2022, the then Chancellor, Kwasi Kwarteng committed to extending the EIS and VCT schemes beyond the 2025 sunset clause, saying “The Enterprise Investment Scheme. The Venture Capital Trusts. We will extend beyond 2025.”
But then, after some delay, at a Treasury committee meeting, on 14 June 2023, in answer to the Chair’s request for clarity over the sunset clauses, and referring to uncertainty that was being caused, Andrew Griffith, Economic Secretary at HM Treasury, replied: “I think we have given a very clear statement that the schemes will run until 2025.” Please see here. This statement caused some consternation at the time.
However, in the 22 November 2023 Autumn Statement, the Government announced the extension of the operation of the EIS and VCT schemes from 6 April 2025 to 6 April 2035.
Seed Enterprise Investment Scheme (SEIS)
There is no similar provision for the SEIS. This is because the SEIS, being for smaller investment amounts, is a de minimis State aid, rather than a notified State aid. As such, even if the legislation had remained unchanged, SEIS tax reliefs would have continued to be available after April 2025.
Comment
The announcement of the extension of the EIS and VCT schemes beyond their sunset date of 6 April 2025, to 6 April 2035, will provide certainty for investors. Where the risk appetite of a client is appropriate, utilising an EIS or VCT can prove beneficial for clients. For clients who have exhausted the typical tax advantages, such as pensions and ISAs, the taxation advantages of such an investment can be significant.
Note that VCT dividends can be free of income tax within certain limits, which may increase their attractiveness bearing in mind reductions in the tax-free dividend allowance to £1,000 from 6 April 2023 and £500 from 6 April 2024.
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The Financial Conduct Authority (FCA) does not regulate tax advice.
This information is correct as at 14/12/23
Source: https://www.investmentweek.co.uk/news/4136859/treasury-confirms-extension-vct-eis-sunset-clause