UK: New Tax Incentives For Investors

Last Updated: 26 June 2011
Article by Ray Smith and Zoe Hammond

In the 2011 Budget (delivered on 23 March) the Government announced a number of important tax measures designed to encourage UK resident individuals to become "entrepreneurs" and invest in higher-risk unquoted trading companies and companies operating in the life science and bio-tech sector.

The measures increase the levels of tax relief for investors, and widen the eligibility criteria for investee companies. The measures will be provided for in the Finance Act 2011 (the first draft of which was published on 31 March 2011) and the Finance Act 2012.

Subject to EU State Aid approval, individual investors will now be entitled to 30 per cent income tax relief (an increase from 20 per cent) in respect of the amount they invest into enterprise investment schemes (EIS). From 6 April 2012, investors can invest up to £1 million per tax year into EIS (the previous limit was £500,000) and both EIS and venture capital trust (VCT) relief will be available for companies with up to 250 employees (increased from 50), with gross assets of not more than £15 million, and which are seeking to raise £10 million (increased from the previous limit of £2 million) of capital in a 12-month period. However, companies operating in the renewables sector claiming "Feed-in Tariffs" will now be excluded from companies qualifying for VCT/EIS relief.

The Government also announced, as part of a wider package of encouraging entrepreneurial investment, an increase to the lifetime limit for capital gains that qualify for "entrepreneurs'" relief (which, subject to certain conditions being satisfied, results in an effective capital gains tax rate of 10 per cent) to £10 million (from £5 million) for disposals of qualifying shares on or after 6 April 2011. This was coupled with the usual increase (to £10,600) of an individual's annual exemption from capital gains.

For companies operating in the life science and bio-tech sector, the rate of research and development tax credits for small and medium enterprises will be increased to 200 per cent from April 2011 and 225 per cent from April 2012.

In summary, the new measures are good news for UK individual investors and for UK businesses in general. The measures were also, in part, a pleasant surprise and welcome relief. As the tax rates applicable to capital gains (28 per cent or 10 per cent where entrepreneurs' relief is available) are considerably lower than income tax rates (40 per cent for higher rate and 50 per cent for additional rate taxpayers), there was a real concern prior to the Budget (particularly given the Government's urgent need to cut the budget deficit as quickly as possible) that the Government might move towards aligning capital gains tax and income tax rates. Fortunately, the Government resisted this temptation and instead introduced changes that demonstrate that it is committed to trying to kick-start the economy through private sector investment and investment in high-tech industries

When is a company insolvent?

A new judgment of the Court of Appeal has made more complex and subjective the determination of whether a company is insolvent by reason of the so-called balance sheet test in section 123(2) Insolvency Act 1986.

Although the case concerned a structured finance, asset-backed, transaction, the Court's detailed consideration of the balance sheet test is of considerable general interest.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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