Investments do rise and do fall in value and we strongly advise that professional advice is taken before investing your money
Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT) both started out as esoteric investments for wealthy investors, they are now perceived as established and could be considered Mainstream.
Their popularity has continued to increase and is understandable at a time of restricted pension contributions for high earners and increasing tax bills. However, the need for advice is vital in order to understand the risks and return potential of investment, as well as timing and liquidity.
There is a danger when assessing VCTs and EISs together as it perpetuates the myth they are interchangeable. While understandable, given they both invest in similar groups of underlying companies with similar qualifying characteristics, VCTs and EISs are very different in their structures and the tax breaks they offer.
looking at the tax breaks, maximum investment amounts and minimum holding periods could lead to a conclusion EISs are the better option.
Investors who invested in EISs need only hold their investment for a minimum of three years and can invest up to £1m per tax year. They can receive 30 per cent upfront income tax relief, which can be carried back to the previous tax year if required and receive capital gains tax deferral. The investment will qualify for business relief after being held for two years, putting it outside their estate for inheritance tax purposes.
Whereas investors in VCTs need to hold their shares for a minimum of five years to claim the same 30 per cent upfront income tax relief. They receive tax-free dividends from successful realisations or income generated from within the VCT but do not benefit from CGT deferral relief or business relief. VCT investors are limited to a maximum investment of £200,000 in each tax year without the ability to carry an investment back to the previous tax year. Indeed, on the surface, the EIS wins hands down. However, an investor needs to take a closer look at the subtler differences between the two in order to invest in the correct structure for them.
While the tax benefits of an EIS might be greater than those available under a VCT, whether they are better in practice depends upon if the investor needs or can use such benefits. Although both vehicles are high risk in nature a VCT has a broader asset split and therefore could be considered lower risk of the two, but again advice is important.
Steven is a Fellow of the Personal Finance Society, whom is passionate about investing and getting the most from your money.
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The guidance and or advice contained within this website is subject to the UK regulatory regime
and is therefore primarily targeted to customers in the UK.
The FCA does not regulate taxation advice. The value of your investments may fall as well as rise.
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