Boost for small company investors as tax breaks forecast

Private investors could be given new incentive to invest in fledgling firms as the government seeks to boost growth, it has been predicted.

Chancellor George Osborne has been tipped to use the Budget on 23 March to unveil proposals aimed at making enterprise investment schemes (EISs) more attractive to investors. But the move could be in tandem with a downgrading of the tax relief on venture capital trusts (VCTs), after Osborne last week suggested there was a "question mark" over the merits of the schemes.

VCTs are stock market listed schemes offering 30 per cent tax relief on investment in small, growing businesses, provided the shares are held for five years or more.

EISs offer 20 per cent tax relief on investments in unquoted companies - provided the investment is held for at least three years - and have capital gains tax and inheritance tax advantages.

Bruce Saunderson, head of wealth management at PricewaterhouseCoopers in Scotland, predicted changes as the government reviews tax reliefs.

He said: "EISs and VCTs were originally introduced to encourage more people to invest in small start-up companies, and in turn create SME growth. However, the associated rules and reliefs have proved confusing and cumbersome.

"If we are to encourage investment in small businesses, the government must simplify ways in which investments can be made."

Donald Campbell, head of private client services at Deloitte Scotland, said the tax relief on EISs could be extended, perhaps to 50 per cent, to attract more investors. "That would be of interest to those paying 50 per cent income tax and happy to invest in growth businesses. The government would get some benefit back if it helps keep people in jobs."

However, that could be at the expense of VCTs, he added. "Very few VCTs have held onto significant value. It's a similar risk with EISs, but I wonder if VCTs are not achieving what they are supposed to be doing."