Traditional end of tax year investments for the wealthy are drying up after government rule changes.
Venture Capital Trusts (VCT), Seed Enterprise Investment Scheme (SEIS) and the enterprise Investment Scheme (EIS) look forward to a flood of investment as the tax year winds down.
But this year, the number of investment opportunities has been severely limited by policy changes.
Seven of 19 VCTs still open for investment are already full and late comers are expected to miss out as a reduced pension annual allowance leaves wealthy investors awash with cash.
They are limited to ploughing £40,000 a year into pensions, and top earners on additional rate tax (45%) have seen their allowance reduce on a sliding scale to just £10,000.
Rule changes hit supply
But European Union rules barring state aid have stopped VCT management buy outs that has impacted the number of deals available this year.
EIS investments are also in short supply as the government introduced new rules halting energy focused investments. These green technology deals accounted for almost half of all EIS investments last year.
Trade body the Association of Investment Companies (AIC) has revealed that VCT investment was more than £400 million for the past three tax years with a high of £458 million, but is unlikely to top £389 million this year.
By the second week of February, investors had already committed £253 million.
Tax incentives for investors
VCT, SEIS and EIS are all tax-incentivised investments.
- VCT is a five-year commitment offering a 30% tax refund and no tax on dividends paid for a maximum £200,000 investment in a tax year
- SEIS is a three-year commitment with a 50% tax refund, no tax on fund growth. The maximum investment is £100,000 in a tax year.
- EIS is a similar set up to SEIS but provides a 30% tax refund and no tax on fund growth over three years. The maximum investment is £1 million.
Any income from SEIS or EIS dividends of taxable, while both offer some capital gains tax benefits that are not available to VCT investors.
The tax is paid against income tax paid – if no tax is paid, no refund is available.
The amount can be maximised by carry forward rules.