What you need to know about venture capital trusts and enterprise investment schemes
VENTURE Capital Trusts (VCTs) and Enterprise Investment Schemes (EIS) are both hugely popular forms of investment in the UK. Each scheme has its own advantages and disadvantages, which we will cover in this article. There are similarities between the two schemes – they both encourage investment in smaller trading entities and they both share similar legislative features. However, there are differences you ought to be aware of before deciding to invest.
The EIS scheme is the oldest of the two, first introduced in 1993 as a means to help smaller companies raise finance. Investors are incentivised by a number of tax reliefs when they purchase new shares in these companies. Many years later, George Osborne would announce the ‘Seed EIS’, which he claimed would help entrepreneurs to raise funds for small start-ups. Again, this would come with tax breaks.
VCT schemes, on the other hand, spread the investments over a variety of different companies, which in theory poses a lesser risk to the investor. Under this scheme, investors subscribe for shares in companies on the London Stock Exchange, which is similar in many ways to investment trusts.
Now that we’ve noted the differences between the two, let’s examine the advantages and disadvantages
VCT schemes, on the other hand, spread the investments over a variety of different companies, which in theory poses a lesser risk to the investor.
of the schemes.
Three key advantages of the EIS scheme are:
INCOME TAX RELIEF 1
Relief is at 30% of the cost of shares, which is set against the investors’ income tax liability for the tax year in which the investment was made.
CAPITAL GAINS 2 TAX EXEMPTION
Providing a client has received income tax relief and the shares have been disposed of after being held for the qualifying period, any gain is free from Capital Gains Tax.
LOSS RELIEF 3
If, in the unfortunate circumstance that shares are disposed of at a loss, investors can offset their loss sustained against any income of the year in which they were disposed of or any income of the previous year. Of course, there are some key disadvantages to consider too, the main one being the risk of higher potential losses. Due to the young age of the companies involved, the risk is higher than that of larger, more mature companies. Three key advantages of VCT schemes are:
Income tax relief – Individual shareholders can claim income tax relief at a rate of 30% of up to £200,000 (if shares are held for at least five years).
Dividends – No income tax is payable on dividends from VCT shares. Capital gains tax – No CGT is payable on disposals of VCT shares.
The disadvantages are similar to that of EIS schemes, as VCTs primarily invest in small companies in need of financial support, so while there is potential for highgrowth, you aren’t investing in well-established companies with long track records.
Before taking any action though, we always recommend seeking professional financial advice.