Noth­ing ven­tured

What you need to know about ven­ture cap­i­tal trusts and en­ter­prise in­vest­ment schemes

EDP Norfolk - - Finance -

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.

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