People, understandably, wish to pay as little tax as possible. The notion that ‘a penny saved is a penny earned’ is widely appreciated in the investment sector and can often be achieved without compromising risk. Such is the importance placed on reducing tax affairs, many could now be tempted to look at alternative investments as a result of annual and lifetime pension limits being squeezed by the government.
However, just because investment vehicles share tax advantages, that does not necessarily equate to alignment in terms of suitability. Risk is perhaps a more important factor, as sharp fluctuations in value can easily wipe out any initial or ongoing tax relief. Saving tax can be highly attractive, but is it something people are prepared to enjoy at the risk of losing not only this tax relief, but perhaps also the entire initial investment?
Investment in small companies
Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EISs) have been available since the mid-1990s. Investors are tempted with upfront tax relief of 30 per cent in order to encourage investment in small and ambitious companies. Seed Enterprise Investment Schemes (SEISs), introduced in 2012, provide even greater tax breaks by offering 50 per cent relief upfront.
Performance of VCTs can be found in Table 1.
All three schemes have long been viewed as a solution for sophisticated investors with extensive experience and healthy appetite for risk. But with further pension restrictions now in force as of 6 April, there is a growing consensus that these alternative investments could be used to quench the relentless thirst for tax relief.
VCTs and EISs are not only important for investors, but also the nurturing and funding of small and medium-sized businesses. According to a government report by the Department for Business Innovation and Skills, there were a record 5.4m private sector businesses at the start of 2015 – an increase of 146,000 since 2014 and 1.9 million since 2000. Small- and medium-sized businesses accounted for 99.9 per cent of these, employing 60 per cent of private sector staff.
“VCTs are a vital cog in the funding machine for new businesses. With bank lending remaining hard to come by for new companies, VCTs offer an alternative solution for entrepreneurs looking to build their brands and grow their businesses,” says Andrew Wolfson, managing director at Pembroke VCT. He further explains that they, “remain an important source of funding for young and exciting businesses, in turn contributing to the growth of the UK economy overall.”
