FSA warns on VCT and EIS promotions

The FSA plans to crackdown on VCT and EIS marketed on tax incentives that were offered without highlighting any associated risks.

The FSA is planning to crack down on Venture Capital Trusts (VCT) and Enterprise Investment Schemes (EIS) marketed primarily on tax incentives that were offered without highlighting the risks involved.

The regulator says the increase in tax relief, along with the wider reform of the VCT and EIS sector, is likely to result in an increased demand for the products.

The changes in the 2011 Budget saw EIS receive more favourable treatment, with Chancellor George Osborne increasing the level of income tax relief from 20% to 30% from April 2011 onwards.

From April 2012, the Government will double the annual EIS investment limit for individuals to £1m. It will also increase the qualifying company limits from 50 to 250 employees and gross assets from £7m to £15m for both VCTs and EIS. The Government will also raise the annual investment limit for qualifying companies by 400% to £10m for both vehicles.

The FSA says both vehicles should promote the tax benefits and potential risks proportionately, and that firms must take responsibility for what information appears. It says key drawbacks of the promotion are also to be highlighted more effectively.

It says: “We have noted EIS/VCT investments are often highly promoted on their preferential tax status. Where this is the case, the promotion must include a prominent reference that the tax treatment depends on the individual circumstances of each client and may be subject to change in future.”

“In addition, the availability of tax reliefs depends on the companies invested in maintaining their qualifying status. Please refer to the HM Revenue & Customs website for further guidance on the tax relief available on EIS/VCT investments.”

The FSA also says it took action resulting in firms amending or withdrawing around 200 financial services promotions in the first half of the year, with over half of that total relating to investment products.

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