Nothing ventured, nothing gained

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Tax planning offers an opportunity to shine

Chances are that you have heard recently about a home-grown entrepreneurial success story. Smart prediction technology app SwiftKey, developed by London-based Touchtype, has been acquired by Microsoft this month.

SwiftKey is widely recognised as one of the world’s best keyboard applications for mobile devices. It is currently being used on more than 300m mobile phones and tablets worldwide . SwiftKey’s success is partly due to the fact that the company was backed by venture capital funding from an early stage, which gave two founders with a passion for artificial intelligence the opportunity to build a global business that could scale quickly.

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The UK is now an increasingly accommodating place for entrepreneurs, and London is Europe’s largest tech hub. Yet while the sale of SwiftKey has gathered headlines, investors may still be scratching their heads as to how to access this niche corner of the market. After all, it can be hard to know how to access unlisted entrepreneurial companies. But here is where tax-efficient investing offers something special for entrepreneurs and retail investors alike.

Since the mid-1990s, successive governments have supported smaller UK companies through two tax-efficient structures: Venture Capital Trusts (VCTs) and the Enterprise Investment Scheme (EIS). Investing in smaller companies contains higher risks than investing in listed stocks, which is why investors are offered attractive tax incentives.

For VCTs, investors can receive up to 30 per cent income tax relief up-front on investments of up to £200,000 in any tax year, as long as the shares are held for a minimum of five years. Additionally, any dividends earned are tax-free, and there is no capital gains tax to pay when it comes time to sell the shares.

For EIS, the tax reliefs are even more compelling. Investors can still receive up to 30 per cent income tax relief, but this can be on investments of up to £1m, and the minimum holding period is three years. Also, EIS investments typically include full inheritance tax exemption (provided the shares are held for at least two years and are still held at the time of death), capital gains tax deferral (which is eliminated if held until death), and up to 45 per cent loss relief on any holding that falls in value.

VCTs come in all sorts of shapes and sizes, but they are all listed companies in their own right and many seek to offer regular dividends as well as the potential for special dividends. While some choose to invest in specialist niche sectors, other, larger VCTs make a virtue of the fact that holding more portfolio companies offers greater diversification. Some high-profile examples of companies that have benefited from VCT investment include Zoopla Property Group, Secret Escapes, and LoveFilm. EISs takes a slightly different approach, as they allow investors to invest directly in businesses, but often also focus on specific sectors, such as renewable energy, infrastructure or healthcare services