EIS and VCT

2023: Making the Most From VCT & EIS Allowances

havenifa

havenifa


Posted on: 6th June 2023

Following the end of the tax year, you will witness many blogs and articles that urge you to begin to plan on making the most of your retirement planning Cheshire and ISA allowances before the end of the next tax year. One thing that could be focused on more, which is relevant for investors, is planning on making the most of your EIS and VCT allowances. What you may not hear regarding them is it is always a case of using them – or losing them.

The thought of losing something of great benefit simply because you didn’t know about them is frustrating. Let’s look at Venture Capital Trusts (VCTs) and the Enterprise Initiative Scheme (EIS), their benefits to investors and the risks/rewards associated with them.

Venture Capital Trusts (VCTs)

When people are attracted to VCTs, they focus on the generous tax relief it offers. VCTs offer 30% tax relief on investments of up to 200k a year, encouraging investors to push money into smaller companies – but with higher levels of risk.

The tax relief is a credit against the investor’s total tax liability and cannot exceed the tax owed for the relevant year. The relief only applies to new VCTs and should that investment not be held for 5 years, that tax relief is clawed back by HMRC. An advantage is that there is no Capital Gains tax on any sale of your VCT shares – provided that the company you invest in still has its VCT status, even if you have not held the shares for five years.

These are significant tax advantages – but with considerable risks associated. Backing smaller, less-established businesses are always going to be riskier. It can be hard to find buyers when you want to sell your VCT investments. VCTs also come with higher fees, potential performance fees and acceptance that some to all of the original capital could be lost for good.

To fully understand the risks and strategy around venture capital trusts, consult with independent financial advisers Manchester before leaping into the proposed advantages.

Enterprise Initiative Scheme (EIS)

The EIS is similar in that it was established to aid early-stage companies with the benefit of generous tax relief. Like VCTs, investors stand to get 30% in tax relief – but the amounts are much larger.

Investors can get relief on up to one million pounds invested per tax year or double as long as half of it goes into knowledge-intensive companies. Profits on EIS shares are exempt from Capital Gains Tax if held for at least three years and can be passed on free from Inheritance Tax after being held for just two years.

Much like VCTs, investors will be putting money into companies with no track record, making them at higher risk by definition. Losses on EIS share sales can be offset against the investor’s income tax or CGT liability – which makes them a little better and attractive to investors.

No matter which appeals to you more, consulting with independent financial advisers Cheshire is an essential step before diving into the opportunities presented. Contact the team at Haven IFA today to learn more about the benefits of EIS and VCT.