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HMRC internal manual

Venture Capital Schemes Manual

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HM Revenue & Customs
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Lifetime limit on risk finance investments

The maximum amount of relevant investments a company and its subsidiaries may receive is £12 million, unless the company is a knowledge-intensive company, in which case the limit is £20 million.

The rules for the lifetime limit operate in a similar way to the annual limit in determining the relevant investments that are taken into account for the purposes of this condition.

The relevant investments an issuing or relevant company has received include relevant investments that have been employed for the trade of a subsidiary of the issuing company (whether or not the investments were raised by the issuing company) and in any other company which used the money for a trade that was subsequently transferred to the issuing company.

The relevant investments received by a subsidiary which subsequently leaves the group still count toward a company’s funding limit except for relevant investments made after the subsidiary left the group.

Example 3

Company C is the holding company of just one subsidiary, Company E, which started trading on 1 July 2014. Company C sold its other subsidiary, company D, on 30 November 2014. All the companies are less than 7 years old, and their business activities were started from scratch after they were incorporated.

Company C wishes to raise money from EIS investors on 1 January 2016 to employ in company E’s qualifying activities. Company C is not a knowledge-intensive company and so the limit is £12 million.

Company C has raised risk finance investments as follows:

1 July 2010                 £2 million – for company C’s activities

1 December 2011       £2 million – for company C’s activities

1 January 2013           £2 million – for company D’s activities

1 April 2014                 £2 million – for company D’s activities

1 June 2015                £2 million – for company E’s activities

The maximum amount of risk finance investments company C can raise in future is £2 million.

 

The relevant investments of subsidiaries and trades acquired by the issuing or relevant company or a subsidiary of the company after the investment is received also count towards the lifetime limit if:

  • The acquisition is made within 3 years of the investment (for EIS investments) ITA07/S173AB or 5 years of the investment (for VCT investments) ITA07/S280B(3B) and 292A and
  • The money raised by the investment is used wholly or in part for the business of the subsidiary or trade acquired after the investment was received.

The purpose of this rule is to stop companies getting round the lifetime limit by using the money on a subsidiary company or trade that it acquires after raising the investment where, if it had acquired the subsidiary company or trade before raising the investment, the lifetime limit would have been breached. This would happen where the new company or trade has benefited from earlier relevant investments that, together with the relevant company’s relevant investments at the investment date, would breach the relevant company’s investment limit.

Example 4

Company F, which is not a knowledge-intensive company, has received an EIS investment of £2 million, bringing its total relevant investments to £8 million. At a later date, using other funds, company F wants to acquire company G and employ the £2 million EIS investment it raised in company G. Company G is not a knowledge-intensive company and has already received relevant investments of £5 million. The effect of company F using the money for its subsidiary, company G, would be that company F would breach its lifetime limit of £12 million and the investments would not be eligible for relief.

 

If the EIS money is used for one of the companies or trades acquired after the relevant investment was made then all of the relevant investments received by the subsidiaries acquired since the relevant investment was made are taken into account in determining if the issuing company’s limit is breached.

If the money has been raised from a VCT then the investment will not be a qualifying holding and, depending on the circumstances, for example where the VCT knew how the money was to be used, the VCT could risk losing its status.

Example 5

The facts are the same as for example 4 except that after company F raised the £2 million, and before acquiring company G, company F used other funds to acquire a business from another company and the business is being carried out by one of company F’s other subsidiaries. The previous owner of the business had employed £5 million in the business, having raised the money from VCT investors.

The lifetime limit of company F is not breached when it acquires the business even though the relevant investments of the group are £13 million because company F does not intend to use the £2 million in the newly acquired business.

The breach of the lifetime limit occurs only when it employs the £2 million in company G, by which time the total relevant investments of the group are £18 million.