How can clients use EISs and VCTs?

This article is part of
Guide to year-end tax planning

How can clients use EISs and VCTs?

Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCTs) are typically viewed as fairly complex and risky investments, which may deter some advisers from recommending them to clients.

But some of the tax advantages and changes to pensions could make them a more appealing prospect.

Before dipping a toe into the world of EIS and VCTs, advisers will need to have an understanding of the reliefs available and what these vehicles can hold so they are better able to make use of these for the right clients.

Risks and reliefs

These tax-efficient vehicles typically invest in smaller companies that are not listed on any stock exchange, so the investments held within them are considered higher risk.

But to offset this, the government offers generous tax reliefs for anyone who invests via these schemes.

Annabel Brodie-Smith, communications director at the Association of Investment Companies (AIC), explains: “VCTs offer a way to invest tax-efficiently and provide funding to the UK’s most dynamic young companies. 

“A client can invest up to £200,000 in new VCT shares each year and receive 30 per cent upfront income tax relief providing the shares are held for five years. All VCT shares also benefit from tax-free dividends and capital gains.”

Under EIS, the maximum annual investment clients can claim relief on is £1m – or £2m if at least £1m of that is invested in knowledge-intensive companies, as the government stipulates.

Like VCTs, investors can claim 30 per cent upfront income tax relief, rising to 50 per cent for a Seed Enterprise Investment Scheme.

Advisers and their clients should also be aware that EIS shares must be held for at least three years and VCT funds for five years.

Andrew Robins, partner at RSM, explains why EIS and VCT vehicles are inherently high risk. 

“This is partly because most EIS/VCT companies are at an early stage in their life, so the risk of failure is high, and partly because investments tend to be illiquid, requiring investors to lock funds in for at least three or five years,” he says. 

“However, the tax advantages of EIS and VCT investments recognise these risks, and for the right investor can make them a very attractive proposition.”

Long history

While the companies held within these tax-efficient vehicles are young, the structures themselves are not. 

As Ms Brodie-Smith points out, VCTs celebrate their 25th anniversary this year, adding that many managers now have established track records.

“Understandably, backing small, young companies is high-risk so it’s important advisers are aware of the risks before recommending them to clients,” she says.

While Huw Williams, partner at OC Chartered Accountants, says EIS and SEIS have been part of an investor’s armoury for years.