VCTs - EIS

With the change in tax rules for earners over £150,000 in regard to pensions Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EIS) have become far more attractive.

VCT

A VCT is a tax structure which enables an investor to receive tax benefits for investing in small, unquoted firms at an embryonic stage or in shares listed on the Alternative Investment Market (Aim) and Ofex. The tax incentive is designed to encourage investors to invest in higher risk ventures and to stay committed for five years. The skill for the VCT investor is to invest in opportunities in which the risk is managed down, while maintaining the VCT wrapper. VCTs which can demonstrate this could form a useful tool in a long term planning strategy in the light of the change in pension legislation for earners over £150,000.

Well publicized is the tax relief which and investor can receive up front by making an investment in a VCT. You can offset 30% of the investment against any income tax you are liable for in a fiscal year, up to an initial investment of £200,000. Not so well publicized and perhaps as important is the tax free nature of any gains made on the investment and income paid out as dividends.

EIS

The Enterprise Investment Scheme ("EIS") is a government scheme that provides a range of tax reliefs for investors who subscribe for qualifying shares in qualifying companies. It is designed in the same way as VCTs to encourage investment in small companies with a much higher investment risk profile.

EIS status is granted to unquoted privately held company’s with less than 50 employees, raising no more than £2 million in a 12 month period and the gross assets are less than £7 million before the investment, or £8 million afterwards.

The main tax benefits to an investor are 20% income tax relief up to £500,000 on the initial amount invested, capital gains tax deferral on previous gains made, no capital gains tax after three years on disposal and after two years for the investment to be outside your estate for inheritance tax purposes.

We will use both EIS and VCTs where appropriate in a client’s financial strategy. However, central to this decision is to make sure that the tax incentives do not override the investment proposition.