Your IndustryMar 12 2014

Alternatives to EIS

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If a client is looking to reduce income tax but has no CGT issues, John Thorpe, business line manager for EIS at Octopus Investmen, says you might advise looking at a venture capital trust (VCT).

VCTs were also created by the government to help support the growth of smaller companies and entrepreneurship in the UK.

Investors in VCTs can benefit from 30 per cent income tax relief, potential tax free dividends and also tax-free capital gains on the disposal of shares, provided all shares are held for a minimum of five years.

For investors with specific tax planning requirements, Mr Thorpe says they are also a powerful tool.

But VCTs are highly illiquid, warns Paul Sedgwick, head of investments at Frank Investments, so investors should be aware that it can be difficult, or impossible, to realise their shares at levels that reflect the value of the underlying asset.

In most cases there is little market for secondary VCT shares, Jonathan Gain, chief executive of Stellar Asset Management, agrees.

Consequently Mr Gain says VCTs can suffer from a significant bid-offer spread, which in some cases can wipe out any benefit of the tax relief. Furthermore, he says they have a minimum holding period of five years.

He says: “Another alternative are Seed EIS, which are for very early start ups and are placed even higher up the risk scale.” Seed EIS qualifies for income tax relief of up to 50 per cent.