In the past 10 years the VCT and EIS markets have doubled in size as awareness of them has grown and the amount investors can save into pensions has been squeezed.
VCT and EIS both offer attractive tax benefits and low correlation to mainstream, large-cap markets.
This can make them appealing to investors who are looking to reduce tax bills and build diversification into their portfolios and who are comfortable with the risks involved.
Both schemes were designed to direct private risk capital into small UK businesses and to help the British economy grow – and both have been successful in realising these aims.
Mainstream and here to stay
EIS was launched in 1994; since then 27,905 companies have received investment totalling over £18bn through the scheme.
We estimate that during the past decade alone EIS has cost the Treasury over £3bn in tax relief. However, our calculations also demonstrate that for the Treasury to “break even” only nine jobs need to be created per £1m of EIS investment.
This assumes jobs are created for three years and have an average remuneration of £35,000. Since jobs in EIS-funded growth focused companies are expected to be held for longer than this, it is likely that in the long term the Treasury stands to receive a profit on its outlay.
The VCT story is a similar one. It began a year later than EIS, in 1995, and since then almost £7bn has been raised.
These initiatives benefit the economy by supporting innovation, which in turn increases productivity, creates jobs and boosts growth. In the long term they can actually make the Treasury money and help Britain to be one of the entrepreneurial capitals of the world. They look here to stay.
The pensions squeeze
A key factor in the growing popularity of VCT and EIS investments is the squeeze on pensions.
These schemes can help investors who want to save for retirement tax-efficiently but who have used all of their pension contribution allowances or may be close to breaching their pension lifetime allowance.
Just a decade ago a client could put £255,000 into a pension each year. Now it is £40,000 – and only £10,000 for the highest earners.
In 2011/2012 the standard lifetime allowance was £1.8m. If this had risen in line with inflation it would be around £2.2m today.
In effect, the allowance has been more than halved. Little wonder that a growing number of clients are asking their advisers about VCT and EIS as a companion to pension saving.
VCT – tax-free income, a yield play
Clients who buy a VCT are essentially buying shares in a company that is listed on the London Stock Exchange and invests in a range of qualifying investments.
Up to £200,000 a year can be invested, and 30 per cent income tax relief can be claimed back – provided an investment is held for at least five years. Any profits on disposal are free of capital gains tax.