The door appears to be shutting on a popular means of lower risk tax-efficient investment as the government clamps down on vehicles that benefit from both public subsidies and tax breaks.
Investment schemes that benefit from Renewables Obligation Certificates or Renewable Heat Incentives are set to lose their tax relief status upon the passage of the Finance Bill, scheduled for July.
These changes, announced in the Budget, will affect a number of Enterprise Investment Schemes and venture capital trusts that invest in renewable energy projects.
Investments in solar power schemes have been particularly prominent, with companies including Foresight and Octopus Investments among EIS managers that have raised money for solar projects.
"This will clearly be unwelcome news for [EISs and VCTs] who focus on renewable energy and where the investment case has been underpinned by the access to significant revenues arising from subsidies," says Jason Hollands, managing director at Bestinvest, the financial advice firm.
David Mott, managing partner of Oxford Capital - whose Infrastructure EIS focuses on solar investments - said that the announcement is not a big surprise, given the government's concerns about low-risk investments benefiting from tax reliefs.
As the costs of installing solar generation have more than halved over the past few years, he said that the case for sustained support through EIS was not as strong as it had been.
Nimesh Shah, senior manager at chartered accountants Blick Rothenberg, said: "It was only a matter of time before the tax relief on solar investment was removed." He sees this announcement as part of a wider clampdown on low-risk EIS schemes, as demonstrated by last week's clarification on the EIS eligibility of television and film co-productions.
Changes in 2012 removed the EIS status of companies whose trade was based substantially on the receipt of the government's feed-in tariffs, which pay households and companies for the energy they generate.
In the Budget statement, the government announced broader concern about the "growing use of contrived structures to allow investment in low-risk activities that benefit from income guarantees via government subsidies".
"These announcements are suggesting that the government wants to take venture capital schemes back to what they were intended for . . . encouraging private investment in UK business," says Mr Shah.
EIS was introduced to made investment in higher risk start up companies more attractive through a package of tax breaks. Investors receive 30 per cent income tax relief, and after two years investments are exempt from inheritance tax under business property relief. Capital gains are tax-free after three years and capital gains tax can be deferred for up to three years.
Investors in schemes set to be affected by these rule changes will not lose any tax relief that they enjoy, but any future gains made after the fund loses its tax-efficient wrapper will be subject to normal tax rates.
The Budget also announced that the Seed Enterprise Investment Scheme, which was launched in 2012 to promote early-stage investments in start-up companies, is to be made permanent.
SEIS investors gain income tax relief of 50 per cent on a maximum investment of £100,000, and also benefit from 50 per cent capital gains tax relief on any reinvestment of assets in an SEIS qualifying company.
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