InvestmentsMar 9 2015

Tax incentives for renewables to end

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As we near the end of the tax year, many investors are looking at Isas, pensions, trusts and inheritance tax planning to try to make the most of their tax allowances.

But one area that may be overlooked is investments in renewable energy.

Chancellor George Osborne in the 2014 Budget announced changes to enterprise investment scheme (EIS) and venture capital trust (VCT) rules, which would “exclude companies benefiting from Renewables Obligation Certificates and/or the Renewable Heat Incentive scheme from the Royal Assent of the Finance Bill 2014”.

However, the details of the announcement noted there were exceptions for anaerobic digestion and hydropower, as well as community energy schemes.

Following a consultation in the summer of 2014, legislation will be introduced in the Finance Bill 2015 in which “all other companies benefiting substantially from subsidies for the generation of renewable energy will be excluded from also benefiting from the EISs, seed EISs and VCTs with effect from April 6 2015. This will remove the current exceptions where anaerobic digestion or hydroelectric power is involved”, the bill states.

This means that after April 6, investments in renewables will no longer be eligible through EISs and VCTs, giving investors just a few weeks to take advantage of the current rules and benefit from tax-free dividend income.

Ben Beaton, principal at specialist EIS and VCT investor Triple Point, explains: “In last December’s Autumn Statement it was announced that from April 6, VCT- and EIS-qualifying investments would not be allowed in companies that benefit from renewable energy subsides.

“For investors, this means that in the next few weeks to the end of this tax year, it is the last chance they have to access these long-term, government-backed subsidies in a tax wrapper, and the income generation or capital growth that they can deliver.”

As a result he predicts there will be a “rush to invest in VCT and EIS funds targeting renewables” before the deadline, but he warns that just investing the money is not the whole picture. He points out that a VCT investment has to be held for five years to secure the 30 per cent income tax relief.

Therefore, one of the main attractions of a VCT is the ability to pay tax-free dividends, making them particularly suitable for long-term income generation, such as the inflation-linked revenues earned by hydroelectric projects.

But Mr Beaton adds: “It is important to know that the underlying transactions – including planning permissions, grid connection agreement and other licences – are all in place, to provide them with the certainty that the transaction will reach a successful close.

“Investors should understand to what extent the investment managers and their development partners have had successful experience in constructing, commissioning and operating renewable projects – such as hydroelectric projects or anaerobic digestion plants – as part of making sure they understand the risks.”

The changes to the investment regime around renewables to avoid the double whammy of tax breaks and government subsidies does make sense.

But at the same time the government is aiming for 15 per cent of the UK’s final energy consumption to be derived from renewable energy sources.

In 2013, the Department of Energy and Climate Change said the proportion was just 5.2 per cent, meaning there is a long way to go.

With many renewable energy sources taking the form of smaller, niche businesses requiring additional funding, the removal of tax incentives as utilised through EISs and VCTs is a potential headwind for the sector.

That said, EISs and VCTs on their own remain a solid tax-efficient investment vehicle, with both schemes offering income tax relief of 30 per cent.

In addition, EISs qualify for business property relief after two years, removing them from an estate for inheritance tax purposes.

But from April 6, the qualifying investments become a little less unusual.

Nyree Stewart is features editor at Investment Adviser