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Alternatives to VCTs

This article is part of
Guide to Venture Capital Trusts

VCTs are often compared to enterprise investment schemes (EIS), which have similar government-designed tax benefits to encourage investment into smaller companies. However, unlike a VCT, an EIS is not a listed company.

Dermot Campbell, managing partner of Kuber Ventures, says like VCTs, enterprise investment schemes offer a great opportunity for people to invest tax efficiently in small businesses across the UK.

In many cases, Mr Campbell argues people rightly choose to invest in both, but he argued the flexibility and benefits of EIS may just have given them the edge over VCTs.

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“HMRC statistics have shown a gradual decline in the amounts invested in VCTs in recent years while EIS investing continues to grow in popularity with over £13bn invested since they first started in 1994 and around £500m invested in the 2011 to 2012 tax year alone.

“Thanks to recent government legislation, such as additional tax exemptions, EIS have become even more appealing to investors and we believe the recent UCIS ruling on EIS could open the doors to up to £2.5bn worth of investment each year.”

The income tax relief on both EIS and VCT investments is the same at 30 per cent, however the maximum annual investment for an individual is higher with EIS and the minimum holding period is lower.

In addition, Mr Campbell explains EIS offer capital gains tax deferral, loss relief, inheritance tax exemptions and the ‘carry back’ facility, which allows tax relief to be given against the income tax liability of the preceding year rather than against the tax year in which shares were acquired.

Michael Piddock, business line manager for VCTs at Octopus Investments, counters that there is a not a regulatory requirement for EIS to provide the same levels of transparency and it can be more difficult to find publicly available information on them.

Minimum investment levels for EIS also tend to be higher, he added.

“While VCTs earn their tax reliefs by investing in smaller companies and carry the risks associated to investing at this end of the market, they are also a highly tax efficient way of investing for the long term.

“So we think it is better to compare VCTs with stocks and shares Isas and pensions.

“Like VCTs, both Isas and pensions offer tax incentives – pensions provide a tax break when you invest, while Isas give you tax relief on capital growth.

“VCTs give you both, offering tax relief when you invest and on the capital growth in the form of tax-free dividends.

“In particular, VCTs can be very effective alongside pension schemes to build up a nest egg for later life. Instead of being drawn down like a pension, VCTs that produce regular dividends give investors a tax-free income for as long as they are held.”

Jemma Jackson, PR manager of the Association of Investment Companies, said often VCT providers also run enterprise investment schemes, but there are important differences between the two schemes.