Major changes to EIS and VCT for 2012/13

The Chancellor's Autumn Statement contained few surprises, the main exception being changes in the rules affecting Enterprise Investment Schemes ('EIS') and their collective investment variant, the Venture Capital Trust ('VCT').

EIS were introduced in 1994 and VCTs in 1995, both with the intention of encouraging investment in small companies by offering tax concessions. EIS invest in single companies which satisfy certain criteria and VCTs in portfolios of qualifying businesses. Up to £500,000 can be invested annually via EIS, and £200,000 via VCTs; and both schemes offer up-front income tax relief of 30%. In addition EIS provide exemption from capital gains tax if held for at least three years, and VCTs for five years.

The first change announced in the Chancellor's statement is that the investment limit for EIS is to be increased to £1 million p.a. The second is that restrictions on the size of companies in which the schemes can invest are being relaxed to include companies with assets up to £15 million and up to 250 employees.

The major surprise in the autumn statement is that a new 'Seed EIS' ('SEIS') is to be introduced to encourage investment in start-up businesses. A major accountancy firm describes as "astonishing" the fact that SEIS will provide 50% income tax relief in the tax year 2012/13 on investments up to £100,000 even if investors' own tax rate is lower than 50%. In addition, if the investment is made from gains made from the sale of other assets in the same tax year, these gains will be exempt from capital gains tax.

As a result, every £1 invested in SEIS will cost the investor only 50p. In fact, the total relief will amount to 78% if gains are reinvested and account is taken of the 28% saving in CGT.

However, the benefits of SEIS could be outweighed by the very high risk of investing in start-ups, and the difficulty in conducting due diligence suggests that it is unlikely that SEIS will be available as a retail product. Investment is likely to be confined to entrepreneurs' friends and families.