Tax reliefs direct long-term capital to businesses and sectors with high growth potential
In the middle years of the 1990s, the UK Government kicked off a quiet revolution in the way long-term investment is directed to smaller companies.
In 1994, the Enterprise Investment Scheme was launched. The following year saw the advent of Venture Capital Trusts. June 1995 also saw the launch of the Alternative Investment Market (AIM). A quarter of a century on, these initiatives continue to play an important role in directing patient capital towards early-stage businesses.
If you have a client with a tax planning need, you may well decide to recommend a tax-efficient investment that has exposure to unquoted or AIM-listed companies.
Whether it’s income tax relief, inheritance tax relief, deferral of a capital gain or some other tax planning need, clients sometimes like to know why the Government allows them to claim these benefits.
At a high level, these reliefs represent an incentive to put capital into an investment that carries an extra element of risk, and keep it there for a number of years. As such, tax reliefs represent a stimulus for economic growth.
While this is an accurate explanation for why a client can claim a relief, it’s also rather abstract. One way to bring the concept to life is to give examples of companies that meet the qualifying criteria for the relevant investment.
The next Octopus Online Show will feature members of the Octopus Ventures team, one of Europe’s largest venture capital teams. As well as hearing from them, you’ll also hear first-hand from some early-stage company CEOs about how the money injection from tax relief investments has helped their business thrive.
Another way to demonstrate the economic benefits of these tax reliefs – and therefore help a client understand why they exist – is to consider the existence of AIM itself.
The economic success of AIM
When AIM was set up in 1995, it replaced and expanded the scope of the Unlisted Securities Market that preceded it. The idea was to create a space where companies could raise long-term capital and do so earlier in their growth journey.
On the first day of trading, there were ten companies listed, with a combined value of £82 million. Today, AIM consists of around 850 companies, with a combined market capitalisation of over £100 billion. Since 1995, the market has helped over 3,800 companies raise more than £115 billion.
Other equity markets, like the Nouveau Marché in France, have attempted to replicate AIM without the same success. Not every company on AIM qualifies to be held as part of a tax efficient investment. But enough of them have down the years to make a strong argument that tax reliefs, and the long-term investments they encourage, have contributed to AIM succeeding where attempts to copy it have failed.