To compensate for some of the risks involved in investing in early-stage UK businesses, the Enterprise Investment Scheme (EIS) allows investors to claim generous tax reliefs. Bobbie can claim up to 30% up front income tax relief on her investment, and she has the potential to make a tax free gain on her investment. She could also claim relief on any losses, against gains or income, should an individual EIS-qualifying company in her portfolio fail.
Critically, Bobbie could also use her EIS investment to defer the gain she crystallised upon selling her rental property. That means gains would come back into charge when the individual companies within her EIS portfolio were sold (or fail). Because EIS portfolios are a long-term investment, with companies maturing at different times within a portfolio, in practice Bobbie might be able to spread the deferred gain over several years and make use of multiple years’ capital gains allowances as it returns to charge.
Bobbie’s adviser then explains that she could invest some or all the remaining capital from the sale of the £900,000 property into a diversified portfolio of investments to target an income.
In addition to using some of the capital to top up her listed equity and bond portfolio, her adviser suggests that a Venture Capital Trust (VCT) could allow her to target a tax-free income (often targeting 5% of Net Asset Value per annum), while diversifying her sources of income.
VCTs invest in a diverse portfolio of early-stage businesses and, like EIS, VCTs also offer tax reliefs to compensate for some of the risks of investing in these types of businesses. Bobbie could claim 30% upfront income tax relief when investing in a VCT and pay no tax on any income she receives from her investment.
It’s important Bobbie understands the risks
Bobbie’s adviser stresses that EIS and VCT investments are long-term, high-risk investments.
The value of the investments, and any income from them, could fall as well as rise. Bobbie may not get back the full amount she invests.
Her adviser also explains that tax treatment depends on individual circumstances and that tax rules may change in the future. Tax relief depends on portfolio companies and VCTs maintaining their qualifying status.
VCT shares and the shares of early-stage companies may be more volatile and harder to sell than the shares of larger listed companies.
Octopus Ventures EIS Service
If you’d like to learn more about how EIS works and how it could help your clients, you may want to look at the Octopus Ventures EIS Service.
Visit the Octopus Ventures EIS webpage
Learn how EIS works and the tax reliefs available
1 The Telegraph, Landlords warn wave of evictions to come, July 2022