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Budget 2008: Enterprise investment and share schemes get 20% boost

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12th Mar 2008
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The chancellor is seeking to enhance a number of tax investment schemes for entrepreneurs - subject to European state aid approval.

As mentioned by chancellor Alistair Darling in his speech, and set out in more detail in BN16, the amount in an Enterprise Investment Scheme (EIS) on which an investor can claim income tax relief in any one year will be increased from £400,000 to £500,000.

Legislation will be introduced in the 2008 Finance Bill to raise this limit from 6 April, but the changes will only have effect when a Treasury order is laid, following state
aid approval of the change.

To meet Europe's state aid criteria, shipbuilding and coal and steel production will now be excluded from EIS as well as the Corporate Venturing Scheme (CVS) and Venture Capital Trust (VCT) scheme.

Amounts invested under an EIS obtain income tax relief at 20%, or a deferral of capital gains. Gains on the investment are tax-free providing that the shares are held for three years; there is also an inheritance tax exemption for such share holdings.

EIS companies have to carry on what is termed a “qualifying trade”, and must be unquoted when the shares are issued to investors. No investor may hold more than 30% of the company's share capital, and, for a period of at least three years, the company must carry on its qualifying trade, and must not be under the control of any other company. For a more detailed discussion, see can an IFA company carry out a qualifying trade for EIS relief?

The ceiling on options granted to employees under the Enterprise Management Incentive (EMI) scheme will also be increased by a similar percentage, from £100,000 to £120,000. To ensure compliance with EU State aid guidelines, the Finance Bill will specify that companies qualifying for EMIs must have fewer than 250
Employees. Once again, shipbuilding, coal and steel production companies will no
longer qualify (BN18).

Philip Fisher, employment taxes and rewards partner at PKF, and author of 'Employee Share Schemes' dismissed the EMI measure as "too little too late".

When EMI first appeared in 1998, an upper limit of £100,000 in shares for each individual was proposed. The limit has not changed in 10 years, Fisher noted, even though executive wage inflation has increased by at least 150% in that period. To maintain the incentive's appeal, the chancellor would have needed to increase the EMI limit to £250,000 or more.

"Many companies will still be forced to mix EMI options with unapproved options, since the new limit of £120,000 will not meet the aspirations of the executives whom they wish to recruit or retain," said Fisher.

"The Chancellor has missed a major opportunity to support smaller businesses," he continued. "To help companies motivate and keep their best staff, there should be a review of the levels as soon as possible with a view to bringing in a £250,000 limit at the earliest opportunity."

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