Investors are being warned changes to the rules governing enterprise investment schemes (EIS) could make as many as 50 per cent of the businesses backed by EIS funds last year ineligible in 2018.
Investors in enterprise investment scheme (EIS) qualifying companies can receive a tax break of as much as 50 per cent of the amount invested, with any income and capital gains exempt from tax.
As FTAdviser previously reported, HMRC had been worried that too many EIS investments were made with capital preservation in mind, when the aim of the EIS tax breaks is to incentivise investment into risk assets.
In the Autumn Budget, chancellor Philip Hammond introduced changes to the EIS rules to encourage investment into “knowledge based” companies, rather than “asset based” businesses it perceives to be investing for capital preservation.
But according to Dermot Campbell, chief executive of Kuber Ventures, a platform for EIS funds, these changes to the type of companies investors can access via enterprise investment schemes could see half of the businesses investors backed last year become off limits this year.
This could mean around 50 per cent of the investments made last year do not qualify in 2018.
Mr Campbell said the changes introduced by the Treasury are “clever” and “not the nuclear option we feared”.
But he said a problem for investors is likely to be "capacity constraint", that is, funds will be reluctant to take in as much money from investors this tax year as they fear they will struggle to deploy the cash into investments that both comply with the regulations and offer attractive returns.
Investors in venture capital trusts (VCTs) were also expecting radical changes to their sector, according to Alex Davies, founder and chief executive of Wealth Club, a platform for investors in tax efficient investments.
He said the expectation of a dramatic shift in the rules governing investments in VCTs prompted investors to buy into the sector in advance of the Budget in November, to the extent that £450m has already been deployed to the sector in this tax year.
Mr Davies said traditionally most of the cash deployed into VCTs comes right at the end of the tax year in April, and if this pattern continues, then it is likely that this financial year will beat the record for fundraising into VCTs which was £542m, raised last year, and the highest amount raised since the financial crisis.
Francis Klonowski, who runs Klonowski and Co in Leeds, is not a fan of VCTs. He said he used the products for a small number of clients in the past but is not eager to do so again.
He said the problem is that, for the funds he invested in, the tax break made up most of the return achieved, and he has a long-standing policy of not investing in something solely for the tax treatment.