Rule changes impacting cash for shares tax incentives for investors in new companies could wipe out half the market, according to financial experts.
They predict too much money will be chasing too few investment opportunities from April, when the government rule change takes effect.
The measure affects Enterprise Investment Scheme and Seed Enterprise Investment Scheme companies.
Chancellor Phillip Hammond has ordered that ‘capital preservation’ companies based around assets are excluded from the schemes in favour of knowledge based businesses.
The tax breaks offered under the scheme can be as much as income tax relief of 50% on equity stakes plus other reliefs.
Don’t delay due diligence
Dermot Campbell, chief executive of Kuber Ventures, a platform for EIS funds, is concerned that half the companies qualifying for funding this year would be excluded in the future, leaving investors with less choice.
“What we are seeing is a series of events that have combined to put severe pressure on the EIS market. With capacity predicted to be much tighter because of legislative changes in the UK, we are encouraging people to start their due diligence early ahead of the coming season,” said a Kuber spokesman.
“Advisers who delay in running due diligence on EIS investment houses and establishing access to capacity in the appropriate assets run the risk of not being able to secure the right assets.”
Supply side gap
He is joined by Mark Brownridge, director general of The EIS Association, the official trade body for EIS investments, said: “What we have seen with the removal of renewable energy investment as EIS investments is HMRC stamping their authority to reiterate that the spirit of EIS is to fund small companies and encourage growth and development in those companies.
“For advisers and investors this means their due diligence on EIS schemes needs to be more detailed than ever and that they will need to explain to clients the relationship between growth investments and risk.
“Removing energy investments leaves a big gap on the supply side and advisers would be well advised to start the due diligence process as early as possible so that they can formulate their recommendation strategy and ensure their clients don’t miss out.”