Autumn Budget 2017: EIS offers the only investment break of the Budget

22 November 2017

Today’s Budget contained very little news, good or bad, for investors and savers: certainly nothing to encourage pension saving, and nothing even about Isa allowance limits increasing in line with inflation as they have done in previous years. 

The only investment sop, surprisingly, was thrown to the relatively few wealthy individuals who make use of the generous tax breaks available through Enterprise Investment Schemes. 

EIS and VCT investments, which provide tax-efficient routes into investment in small growth companies and start-ups with the aim of financing their growth, were expected to be in the firing line of chancellor Philip Hammond in today’s Autumn Budget, with cuts to the front-end 30% income tax relief anticipated. 

But the chancellor instead outlined various measures to support research and development and technological innovation, including a surprise doubling of the EIS investment limits for "knowledge-intensive" companies. 

This will mean the amount an individual can invest goes up from £1 million to £2 million, provided any amount over £1 million is invested in one or more knowledge-intensive companies. The full investment would receive a potential 30% tax relief of £600,000. 

Tracyann Kneen, senior product technical manager at Nucleus, comments: "This is an unexpected move: instead of cutting the tax benefits this offers a very generous tax advantage to a relatively small group of individuals.2

In addition Hammond pledged to ensure "that EIS is not used as a shelter for low-risk capital preservation schemes". The thrust of the announcements is that investors will have to take greater capital risks, in line with the original concept of EIS, in order to gain the tax breaks on offer. 

Alex Davies, chief executive of Wealth Club, says this was "a very good budget for EIS investors". He explains: "It rewards entrepreneurial companies and investors who are prepared to take some risk to support British business. Whilst there will be restrictions on some capital preservation-focused products, investments made in the spirit of EIS will benefit burgeoning business and their investors.

"With all the changes to pensions beginning to bite, this type of investment is only going to grow in popularity," he adds. 

However, Jason Hollands, managing director of the Tilney Group, is less enthusiastic about the government’s "technical tinkering". He points out that the additional EIS investment opportunities are only available for companies that meet very strict criteria. 

Neil Moles, Managing Director of Progeny Group, agrees that the attractions for investors are superficial. "Although doubling the EIS investment limit for particularly innovative companies may look positive, it just adds another layer of complexity. If the chancellor really wants to minimise abuse of the system, he should simplify it not complicate it," he says. 

Hollands notes that proposals announced alongside the Budget also aim to tackle the trend of some venture capital trusts (VCTs) to become more risk-averse by "adopting lower-risk capital preservation strategies rather than ploughing cash into genuine, growth companies to help them expand."

He says: "A new test will be introduced impacting all of these tax-aided venture capital schemes - EIS, VCTs and Seed EIS - to bar any "tax motivated investments". 

"These are deals where the tax relief provided is set to generate most of the return; it is therefore aimed at ending schemes structured to enjoy the tax reliefs while preserving capital. This will involve an assessment of whether the company has objectives to group and develop and whether there is a signifcant risk to capital."

This article was written for our sister magazine Money Observer.

Add new comment