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VCT & EIS

Venture Capital Trust (VCT)

A VCT is a way of investing in smaller companies, not listed on major stock-markets and, in the process, qualifying for generous tax-reliefs, not available on other investments such as ISAs (Individual Savings Accounts).

Because the shares bought by the VCT managers are in small companies, which may not even be quoted on the stock-market, VCTs can be very risky. Consequently, only experienced investors, with an adventurous attitude to risk, should consider using them.

VCTs themselves are quoted on the stock-market.

Contributions to VCTs qualify for tax-relief:

  • The maximum tax-relief available is equal to the total income tax paid by the individual in the relevant tax year
  • The maximum amount which can be invested, and qualify for tax-relief, is £200,000 per tax-year
  • Tax-relief is set at 30%
  • To maintain the tax-relief the VCT must be held for a minimum of five-years

To claim the tax-relief, the investor must use the certificate provided to them by the issuer of the VCT, to arrange for an alteration to their tax code via their local tax office or claim the relief via the self-assessment system.

Any growth in the value of the VCT is free from Capital Gains Tax (CGT), whilst any dividends received by the investor are free from income tax.

The tax-reliefs available to VCT investors can make them seem very attractive. However, there are significant downsides and potential risks. For example, the fact investments are held in smaller, often unquoted companies make the potential for capital loss far greater. Furthermore, these investments may not always be easy to sell and if they are not held by an investor for at least five-years HMRC will reclaim any tax-relief granted at the time of the investment.

Please note

All statements concerning the tax treatment of products and their benefits are based on our understanding of current tax law and HM Revenue and Customs’ practice. Levels and bases of tax relief are subject to change.

Enterprise Investment Scheme (EIS)

EISs were set up to encourage people to invest in smaller companies, giving them a different option to raise finance.

There are three different types of EIS:

  • Single Company: As the name suggests, the shares of just one company would be held in the EIS; this leads to a concentration of risk and potential liquidity issues
  • EIS Portfolio (or unapproved EIS funds): This option generally involves investing in a range of companies, all of which qualify for EIS status. This helps to diversify the risk, although it is still significantly higher than other types of investment due to the small size of the companies being invested in. Tax-relief is only granted when the shares in each company are acquired, not when the money is invested in to the EIS
  • Approved EIS fund: HMRC approves the qualifying status of the EIS and the manager then uses investor’s subscriptions to buy the shares of the companies he, or she, selects. Tax-relief is given in the tax year that the fund closes to new investment

Unlike Venture Capital Trusts (VCTs), EISs are not quoted on the stock-market.

EISs have various tax advantages, including:

  • Tax-relief of 30% on any amount invested up to £1 million per tax-year, subject to maximum relief being equal to the amount of your income tax liability for the tax year
  • The EIS must be held for at least three years for the tax-relief to be maintained
  • The option to ‘carry back’ contributions to a previous tax-year, giving relief against income derived in the previous year
  • Any profits when the EIS is sold are free from Capital Gains Tax (CGT)
  • Any losses can be set against income tax
  • The payment of tax on an unconnected capital gain, from the sale of an investment, can be deferred where the gain is invested in an EIS. To qualify, the investment must be made within the period one year before or three years after the gain arose
  • EIS shares will usually qualify for 100% Business Property Relief after two years’ ownership thereby exluding the value of the EIS from the owner’s estate on death for the purposes of calculating Inheritance Tax

In common with Venture Capital Trusts, EISs have attractive tax benefits, however they also carry significant risks. These include far higher risks than other investments as the EIS will invest in smaller, unquoted companies, which carry a higher risk of failure. The EIS itself may also be illiquid or only saleable at a significant discount, which could lead to a capital loss.

The rules surrounding EISs may change in the future and tax-relief will be lost if the investment is not held for at least three years.

Please note

All statements concerning the tax treatment of products and their benefits are based on our understanding of current tax law and HM Revenue and Customs’ practice. Levels and bases of tax relief are subject to change.