In Focus: Tax planning  

The subtle differences between VCTs and EIS

  • Communicate the differences between EIS and VCT investing
  • Explain what to look out for in either investment
  • Identify opportunities in EIS and VCT investing
The subtle differences between VCTs and EIS
VCTs and EIS offer different benefits, but both can play a role in tax planning. (Photo: Bloomberg)

The findings from the recently published white paper, which emerged from Seneca Partners’ annual adviser roundtable event, suggest something of a paradigm is developing in adviser and investor attitudes towards venture capital trusts and Enterprise Investment Schemes. 

Beyond any doubt, the advantages of both of these tax-advantaged products cannot be overlooked, and while their features are different, their role in appropriate financial planning strategies offers significant and unique benefits.

The wider economic backdrop can mean various things to many people, but financial planning is evergreen and the question of tax is rarely far from the top of most investors’ considerations.

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It is unsurprising that VCTs continue to be the investment of choice, with many VCT providers enjoying long and mature track records of steady growth and tax-free dividends.

But in many ways, the tax benefits of EIS are even more flexible with returns free of capital gains tax, plus the ability to defer any capital gains and also use carry back for income tax relief purposes. EIS shares while still held also offer inheritance tax exemption.

Why then does the EIS appear to be losing some of its appeal in certain segments of the adviser community?   

VCT versus EIS

Government data suggests that almost £1.2bn was raised in VCTs in the year to March 2022. In the previous year, it is estimated that 3,755 companies raised a total of £1.66bn via EIS structures. Not exactly a poor relation, but the EIS market is highly fragmented compared with its VCT cousin.

Investing in a VCT is relatively simple, with shares issued in a quoted vehicle and a single tax certificate issued to investors, upon which they claim income tax relief in the year the shares are issued.

While investors also invest in single company EIS offers, the majority will seek the advice of their independent financial adviser.

There are circa 50 EIS providers in the market all offering a variety of different portfolios, and with a typical portfolio involving six to eight separate investee companies, the time horizon for deploying investors’ capital – which results in six to eight separate tax certificates – can make the process cumbersome.

Investment time horizons can be a double-edged sword, with investors wanting speedy deployment while managers will want to ensure wise deployment into opportunities likely to offer investors the best possible outcomes. However, the bigger question comes over the length of the investment term.

Most VCTs offer a buyback mechanism, which gives investors a way out after the mandatory five-year holding period.

By comparison, the “patient capital” approach within some EIS offers, which focus on early-stage and start-up investments, is known to be approaching 10 years or more, with little sign of anything coming to fruition for investors.

In fact, recent research by independent reviewer Micap suggested that only three or four EIS managers out of circa 50 have ever returned more than 50 per cent of the funds they had raised into their schemes to investors, which is a damning statistic.