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Enterprise Investment Schemes & Venture Capital Trusts


Enterprise Investment Schemes (EIS) are tax-efficient schemes created by the UK government during 1994 and which have since raised over £20 billion in investment. They were designed to encourage individuals to invest in smaller high-risk companies in return for a range of attractive tax reliefs that they could not obtain via directly investing into the companies.

There are a few qualifying rules to meet the EIS requirements. Firstly, investors cannot control more than a 30% stake in any company invested through EIS and can only invest up to £2 million per year, provided anything over £1 million is invested in ‘knowledge-intensive companies’. In addition, eligible companies must have:

  • Fewer than 250 full-time employees
  • Gross assets not exceeding £15 million
  • ‘knowledge-intensive’ companies will be able to receive up to £10 million in EIS funding in a year
  • Held the shares for at least three years from the date of issue of the shares or three years after commencement of trade

There are a number of benefits which are as follows:

Income Tax

Income tax relief of 30% is available to individuals for the entire invested amount in EIS. This tax liability reduction is up to £300,000 per tax year.  Therefore, if you make an investment of £10,000 you can save £3,000 in income tax.

Capital Gains Tax

No Capital Gain Tax is payable/due on disposal of shares provided they are held for three years.

By investing in EIS qualifying shares, investors can defer Capital Gain Tax on gains realised on different assets. To be able to receive this relief, investors must subscribe for EIS shares during the period of one year before or three years after selling or disposing of the asset. Deferral relief is unlimited and can also be claimed by investor whose interest in the company exceeds 30%.

Inheritance Tax (IHT)

Shares in EIS qualifying companies will generally qualify for Business Relief for IHT purposes. Relief can be at rates up to 100% after two years of holding the investment, therefore any liability for IHT is reduced or eliminated in respect of such shares. 

Venture Capital Trusts (VCT)

VCTs began in 1995 to encourage investments into early stage companies based in the UK. Due to the risks associated with early stage investments, HMRC offered investors generous tax breaks for investors taking such risks. VCTs therefore have great similarities to EIS qualifying products, but the key difference is EIS allows direct investments into qualifying companies whereas a VCT is an investment into a trading company that then goes onto provide the start up funding.

To qualify, the VCT must satisfy a number of rules to gain investors tax relief:

  • The VCT must be unlisted at the time of investment with no plans to IPO unless it is onto AIM
  • The company must have less than 250 employees
  • The company must have been established less than seven years ago
  • Funding raised by the company cannot be more than £15million from VCT funds

Tax Relief

As mentioned, in order to encourage investors to take VCT risk HMRC offer tax reliefs, including:

Income Tax

Similar to EIS investing, you receive 30% income tax relief on the amount you invest, but shares must be held for five years as opposed to three with EIS. It is also important to the note the maximum amount eligible for tax relief is £200,000.

For example, if you invest £10,000 into a VCT, £3,000 will be taken off your income tax bill at point of completing your tax return.

Dividends received via VCT’s are also tax free

Case Study 1: EIS recommendation

A long term client of ours, who is a high net worth client and running his own Ltd Company, was looking at reducing the amount of tax he pays whilst also experiencing an investment. Before recommending this type of product we had to ensure he understands the risks especially the illiquidity nature and we had to account for how experienced he was with these types of unregulated financial products. These products although offering tax incentives, are not covered by FSCS (Financial Services Compensation Scheme) nor can the client complain to the Ombudsman. After taking the above into account, we recommended a £10,000 investment into one of our EIS schemes. As this was his first experience investing with an EIS, we only recommended a relatively small amount to start off with and to ensure he still maintains a suitable emergency fund and enough cash that is not locked in an investment. During his next tax return, he was able to obtain tax relief at 30% of his investment which was £3,000 of his £10,000 investment.

Case Study 2: VCT recommendation

A high net worth client of ours aged 61, was in the process of winding down for retirement and was targeting an income of £5000 per month. After performing our necessary due diligence in ensuring he understands the risks that as those mentioned above, we recommended a VCT as one of the investments to achieve this. He had already fully utilised his ISA allowance, was already invested in structured products and peer to peer lending so we recommended a VCT as the next investment. He was also looking at a tax relief investment which the VCT would provide along with capital gains free growth and tax free dividends, the latter of which could be used to provide an income. The VCT also allowed for another avenue of diversification in his portfolio.

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