The investor has to hold the investment for five years, and you access it by buying shares in a new issue, while cashing in by selling the shares.
Clearly this does not work with people who pay no tax as they will not get any benefit, and for high-net worth taxpayers who are paying 40 per cent, there will be a 10 percentage point disparity.
But understandably this tax incentive is incredibly popular, not least because of changes to the pension allowance rules brought in a few years ago.
Andy Gadd, head of research at Lighthouse Group, says: “You used to be able to put £255,000 in a pension [each year]. They’ve reduced it to £40,000, and for some high-net worth people you can only put £10,000 into a pension.”
The other problem is that it is very easy to go over the allowances, in which case you would get fined by HM Revenue & Customs, and to pay that fine, you cannot resort to taking your money out of your pension.
Mr Gadd says: “VCTs are the next best area they could consider investing in. But it’s high risk, so don’t let the tax tail wag the investment dog.
“The very generous tax relief where you get 30 per cent income tax relief isn’t the reason you should buy a VCT. Where’s it going to invest the money?”
This is another, more risky way of mitigating tax, and work on similar principles to VCTs in that the government is trying to encourage investment into early stage companies.
Investors can invest as much as £1m a year into a qualifying company, for which they receive 30 per cent income tax relief. Once held beyond three years, the investment gains are free of capital gains tax and exempt from inheritance tax as well.
John Glencross, co-founder and chief executive of Calculus Capital, which is a provider of enterprise investment scheme funds, says: “They’re a good tool for clients who have had a particularly successful year and are looking for a way to mitigate a painfully high income-tax bill or defer a [CGT] liability.”
The EIS is considered to be highly risky as the chance of losing an investment is relatively high, compared to mainstream schemes, so it is not for the unsophisticated investor.
Mr Glencross says: “Most advisers opt to invest their clients in an EIS fund rather than a single company. It is worth thinking whether to invest in a specialist fund – perhaps one that focuses on a single area like leisure – or a fund with a generalist strategy.”