ENGLAND & WALES Trends and Developments Contributed by: James Ross, Claire Matthews, Karen Bail and Marianna Vlas, Winston Taylor
Winston Taylor 5 New Street Square London EC4A 3TW United Kingdom
Tel: +44 20 7300 7000 Fax: +44 20 7300 7100 Email: london@winstontaylor.com Web: www.winstontaylor.com
While the UK has a vibrant start-up business culture, a perception has grown in recent years that it struggles to scale its successful businesses. Capital markets in the USA are often perceived to offer higher valu - ations than those in the UK, which have underper- formed relatively in recent years, while pools of private capital are also seen as much deeper in the USA. One consequence of this has been a steady stream of UK start-ups flipping to the USA to access those pools of capital – a trend reinforced by the generous capi- tal gains tax incentives available to US taxpayers for investments in US early-stage businesses. The EIS and VCT Regimes – Background and Recent Reforms The UK government is seeking to tackle this challenge by enhancing the tax reliefs available for investments in early-stage companies. Chief among these is the Enterprise Investment Scheme (EIS), which offers 30% income tax relief to individuals making equity investments in early-stage trading companies, as well as a complete capital gains exemption on exit and the ability to defer tax on prior capital gains where the proceeds are used to make qualifying investments. The EIS was introduced in 1994 and has become a well-established and well-used feature of the UK investment scene. The government had previously confirmed that it would continue until at least 2035 (having been scheduled to expire in 2025), and in its most recent Budget statement, it doubled the financial thresholds for qualifying companies.
From April 2026, therefore, companies can potentially receive EIS investments if they have gross assets of up to GBP30 million before the investment, and GBP35 million after it – an increase from the previous thresh- olds of GBP15 million and GBP16 million, respec- tively. The maximum investments under the EIS and other venture capital schemes have also increased from GBP5 million in a year and GBP12 million over the life of the company to GBP10 million and GBP24 million, respectively. These thresholds are increased to GBP20 million and GBP40 million for “knowledge- intensive companies” – which, broadly, are companies spending a certain proportion of their expenditure on research and development and which either develop intellectual property for exploitation or have a certain proportion of skilled employees. The Venture Capital Trust (VCT) regime provides income tax relief for share subscriptions in listed vehicles that themselves subscribe for shares in com- panies eligible for EIS relief. The VCT thresholds for investee companies have been increased in line with the increases for EIS purposes, but the rate of VCT income tax relief has been reduced from 30% to 20%. The government’s justification for this change is that it provides a better balance between the EIS and VCT regimes, given dividends from VCTs are exempt from tax, while dividends from EIS companies are not. What will this mean in practice? The increased thresh- olds will mean that many companies looking to raise Series B or C rounds, and which were previously above the net asset thresholds, will now be able to do so using EIS, making them considerably more attractive
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