The Enterprise Investment Scheme (EIS) enables qualifying investors to set 30%[1]of the subscription cost of shares in companies meeting the EIS conditions against individual income tax liability[2]. The minimum investment per tax year is £500; the maximum is £500,000[3]with the ability to carry back the full allowance to the preceding tax year. The EIS shares must be held for 3 years from issue or the commencement of the trade to avoid claw-back of income tax relief. 

Where shares qualifying for income tax relief (and providing relief has not been withdrawn) are disposed of after 3 years, gains are free from capital gains tax (CGT). In addition, by election losses on disposals can be set against income of that tax year or the preceding year, rather than against gains. If an investor disposes of any chargeable asset and invests in an EIS company within given time limits, the gain on the original chargeable asset is deferred until certain events occur.

Note that, because EIS shares cannot normally be quoted and must be in trading companies, they may attract business property relief from inheritance tax.

Although the EIS has contributed to attracting investment into social ventures, particularly into community-owned environmental energy products with an industrial and provident society (IPS) structure,it is best suited to ventures that more closely resemble commercial enterprises (given the condition required for the EIS company). Many social ventures have a legal structure that does not permit the issuing of shares, and therefore they cannot benefit from EIS investment.

Venture Capital Trust (VCT) scheme that allows investors (who are over 18 but not trustees) to set 30% of the subscription cost of shares in an entity that meets the VCT conditions against individual income tax liability, as well as relieving the income tax burden on dividend income[4]. The maximum investment in any tax year is £200,000 and there is no minimum investment, but there is no carry back facility. To avoid any claw-back of income tax relief, VCT shares must be held for 5 years from issue.

In addition to relief for subscription, dividends of up to £200,000 per annum from VCTs attract income tax relief and this relief applies for both “second hand” as well as newly issued[5].

Disposals of VCT shares are free from CGT providing the VCT qualified when the shares were purchased and sold and provided the investment did not exceed the annual limit.  This is unaffected by any withdrawal of the income tax relief. This relief is available for both “second hard” and newly issued shares. However, no allowable loss accrues to VCT shares sold at a loss. There is no CGT deferral relief where proceeds of a chargeable disposal are invested in a VCT.

Similar to EIS companies, the use of VCTs for investment in social ventures has been limited.¹³

Community Investment Tax Relief (CITR )is designed to encourage investment in accredited Community Development Finance Institutions (CDFIs) in disadvantaged and underinvested areas. The investment must be by loan to the CDFI, deposit with a bank that is a CDFI or subscription for shares in, or securities of, the CDFI. For qualifying investors (both individual and companies) who invest in accredited CDFIs there is tax relief on the equivalent of 5% of the amount invested per year, for up to five years, which, for individuals is set against their income tax liability of that tax year, and for companies is set against the corporation tax liability of that accounting period. There is no limit to the amount of investment on which a single investor may claim relief under the CITR scheme but if for any year the investor does not have enough income tax liability to make full use of the relief any unused relief will be lost.  There are limits on the amount of investment that can be raised by any single CDFI.  There are also circumstances in which the relief will be withdrawn or reduced during the 5 year period from making the investment.

Although CITR has made a contribution to investment in CDFIs, some feel that the uptake of CITR has been disappointing, with only £63m out of a total of £672m of CDFI investment having been raised in this way since CITR was created in 2002. Charity Bank is the biggest user of the CITR scheme and has raised £53.3m in deposits for lending since 2003. The loans made by Charity Bank with CITR funds have unlocked a social return of, on average, six times the level of investment.

The European Commission granted State Aid approval for CITR for 10 years (from 2002 to 2012) and this is currently being reviewed. In the last Budget the government retained CITR following a sustained campaign by the Community Development Finance Association (CDFA).

Footnotes