Tax breaks for those who dare: The successor to BES will provide less easy pickings and cost far more to set up. Caroline Merrell reports

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The Independent Online
The Chancellor's plans to encourage investment in unquoted UK companies will expose the private investor to the high risks associated with venture capital.

One of the proposals for implementation in 1995 enhances investment by introducing PEP-type tax breaks on venture capital investment trusts.

The venture capital investment trust sector comprises 20 funds with about pounds 1bn under management.

The performance of the funds within the sector varies considerably, with some spectacular losses during the recession counterbalanced by some impressive gains over the last year as the funds have bounced back.

On average, pounds 100 invested five years ago in a venture capital trust, assuming no capital gains tax, would now be worth pounds 166; the same amount invested a year ago would now be worth pounds 149.

The income tax breaks proposed would be worth about pounds 40 extra over one year on a capital gain of 40 per cent.

One venture capital fund that exemplifies the risk and rewards in the sector is Sumit, run by Sumit Equity Ventures. Investors who put cash into this fund five years ago would now be facing a one-third loss on their investments. But over the past year a pounds 100 investment would would have nearly tripled.

The Chancellor also plans to increase venture capital investment by replacing the Business Expansion Scheme with Enterprise Investment Schemes that will allow investors who are cashing in shares to provide cash for the new scheme to be exempt from capital gains tax.

The switch will stop the guaranteed returns BES investors have enjoyed. The new scheme offers 20 per cent tax relief on qualifying investments up to pounds 100,000 a year, and is exempt from capital gains tax.

The Government has introduced a new rule that will allow any investor previously unconnected with the company to become a paid director.

The tax breaks will not be available for the private rented housing sector, including assured tenancy schemes, which provided the guaranteed returns under the old BES format.

Any losses incurred by investor will earn tax relief.

BES, on the other hand, offers more attractive tax breaks, with investors getting income tax relief at 25 or 40 per cent on the investment, plus capital gains tax exemption.

BES sponsors believe that the Enterprise Investment Schemes will be expensive to set up.

Charles Fry, chief executive of the BES specialist Johnson Fry, said: 'The expenses on the scheme will be high. You will have look to at 500 companies to find five or ten a year.'

Sending out prospectuses on a scheme with a pounds 1m investment limit would also be a costly exercise.

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