VCT and EIS managers have expressed their concerns about the repercussions for the sector of the government's Patient Capital Review consultation, with possible restrictions on the vehicles set to be announced in the Chancellor's autumn Budget.
Within the document published over the summer, the government pointed to the contribution of current tax-efficient schemes to the funding landscape for small businesses.
"EIS in particular is praised highly by business angels as having supported significant amounts of new investment since its inception," the report says.
However, the consultation paper highlighted the government is most worried about the ability of innovative firms to scale up and source capital for their growth plans.
Meanwhile, it suggests it is "not possible" to ensure tax-efficient schemes only target those firms that would otherwise struggle to access finance. The report added the upfront income tax relief "encourages a subset of investors and fund managers to use them for 'capital preservation' investments".
The Treasury is now understood to be considering plans to stop high earners abusing tax reliefs available through Enterprise Investment Schemes (EIS), according to a recent report in The Sunday Times.
Proposals under consideration include cutting the level of tax relief, increasing the period an investment must be held to over two years, and placing greater restrictions on companies that qualify for funding.
Commenting on the anticipated crackdown, Alex Davies, chief executive of Wealth Club, said: "The chancellor's inaugural autumn Budget this November could herald restrictions on asset-backed EIS investments. They typically invest in businesses such as pubs, crematoria and wedding venues.
"While still risky, this is considered less risky than investing in other young or start-up businesses as if the business does not perform well, investors still have the safety net of owning an asset such as a freehold.
"Such investments are very popular with EIS investors. More than £120m went into asset-backed EIS funds last year. For those investors considering an asset-backed EIS this year, then doing it now would seem prudent.
"While a change is no means certain, there are a lot of suggestions that this opportunity could be closed by the Chancellor come November."
Senior figures within the tax-efficient investment sector are also concerned the review signals another period of unnecessary government meddling at a vital time in the economic cycle.
Pointing to the relatively tight timetable for proposals to be announced, John Glencross, chief executive and co-founder at EIS manager Calculus Capital, said he fears "more instability".
The Review consultation period lasts until late September, after which it is expected Chancellor Philip Hammond will announce possible measures in the budget on 22 November.
Glencross said: "We could have regulation rushed through because they are talking about a consultation process ending in October and then proposals in the autumn Budget.
"We have to be very careful about significant changes to the rules, particularly when clearly the economy is in a fairly delicate place."
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