How can clients use EISs and VCTs?

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

“As an ad hoc investment for those looking to finance innovative (high risk, high return) businesses this is a useful protection tool from losing it all,” he says, “but any serious slice of your investments in these need to be planned. 

“These are early-stage businesses, they are risky and the key thing to remember is that you can do little to influence exit.”

Advisers should certainly be able to make use of these tax-efficient products, even if they are not likely to be the right vehicle for the majority of clients.

So who is the right investor?

Mr Robins says: “EIS and VCTs are best used by individuals with significant tax liabilities who can afford to shrug off losses if an investment goes bad.”

He notes that an EIS investment is more flexible, and provides a wider range of tax benefits, while VCTs can be better at spreading the risk of investments more widely, “which in theory should help maximise investment returns”.

Pension planning

The changing pension landscape has seen VCTs come into their own, as Ms Brodie-Smith notes.

“VCTs have become an increasingly important option for tax-efficient investing following the changes to annual pension allowances, which limited the amount higher earners can put into their pension,” she explains.

“Typically, VCTs are most suitable for investors who have reached the limit for their annual pension allowance and have an income tax liability.” 

The tax-free dividends available to investors in VCTs could also be useful for those clients who want to supplement their income in retirement, she adds.

Mr Williams believes VCTs and EIS can form part of a wider investment strategy, but that clients will need to seek financial advice and consider carefully how much they are tying up in these types of investments.

For many, the appeal may simply lie in the fact they are helping smaller, more entrepreneurial UK businesses and giving them a chance to grow and establish.

Questions to pose

Mr Robins suggests there are some questions clients should ask themselves before investing:

  • How will I feel if I lose everything? 
  • Am I happy to tie up my money for a long period? 
  • Can I use the tax reliefs available? 
  • Have I maximised less risky investments? 

According to Mr Robins, it generally makes sense to maximise pension and Isa contributions before looking at EIS and VCTs.

He adds that clients should also ask themselves what they want from their investment before making use of these vehicles.

“I have plenty of clients who have made a lot of tax-free money in EIS companies, but many more whose shares became worthless,” he says. “VCTs can still lose everything and are less likely to make you a millionaire, but returns have historically been more consistent.