What are the upcoming changes to EIS and VCTs?
The Autumn Budget announced some significant Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs) changes, which will apply from April 2026.
Both EIS and VCTs offer substantial tax incentives to encourage investment in qualifying UK trading companies, although the structure of the schemes is different.
These schemes were viewed as overly restrictive, and the reforms aim to modernise their effectiveness, and application to larger business, largely by increasing the qualifying thresholds.
This is part of the Government’s desire to be seen supporting entrepreneurship and scale-ups, while also recalibrating the balance of tax relief between different investment routes.
Who will be affected?
Following the Autumn Budget, a policy paper outlined the main measures of the proposed reforms.
This indicated that the measures would affect companies raising finance under EIS and VCTs, as well as individual investors using these schemes, fund managers and advisers involved in structuring and promoting qualifying investments.
It is hoped that several hundred businesses will stand to directly benefit from the changes, particularly those larger businesses which were close to the existing funding or asset limits.
The news is less welcome for the 24,000 individual investors who are likely to be hit by the reduction in VCTs Income Tax relief from 30 per cent down to 20 per cent.
What are the key changes?
Upcoming legislation will seek to amend the Income Tax Act 2007 and bring about a host of reforms.
These include:
- The gross assets limit for a qualifying company will increase to £30 million before the issue of shares, up from £15 million, whilst the limit immediately after the issue of shares will increase to £35 million, up from £16 million.
- The annual investment limit will double to £10 million, up from £5 million, as will the limit for Knowledge-Intensive Companies to £20 million, up from £10 million.
- The lifetime investment limit will also double to £24 million for companies, up from £12 million, as well as for Knowledge-Intensive Companies to £40 million, up from £20 million.
- The Income Tax relief that can be claimed by an individual investing in VCTs will be reduced to 20 per cent, down from the current rate of 30 per cent. Income tax relief on EIS investments remains unchanged.
Overall, EIS offers a hugely beneficial package of tax reliefs, including income tax relief on the investment at 30 per cent, capital gains tax exemption on the sale of shares, inheritance tax relief, all assuming the shares meet the strict qualifying conditions.
As a result of the generosity of the tax reliefs, the scheme is, however, relatively complex, including rules around an individual’s maximum shareholding percentage and “connection” with the company and the type of trade into which investments can be made.
EIS can be used very effectively for tax planning purposes. Individuals who have realised a capital gain from any source can potentially consider making an EIS investment into shares in a qualifying company, enabling them to defer all or part of their capital gain, even if they own 100 per cent of the business. The investment can be made up to three years after the capital gain arose.
There are however a number of caveats, restrictions and types of trade which will not qualify, including property development, hotels, nursing homes, leasing businesses, amongst others. Detailed advice is important due to the complexity of these rules.