financial planning strategies

What Separates VCTs and EIS?



Posted on: 4th July 2023

Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EIS) may sound the same if you have no investment experience. Such attitudes towards the belief that they are the same under different labels may affect your understanding of how they benefit you as an investor. There is no doubt that both offer unique advantages in the way of tax planning. Whilst certain features differ, their roles in financial planning strategies bring significant benefits.

Understanding the Benefits

Working with independent financial advisers Cheshire at this stage in history is a huge benefit, and the questions around tax are always at the frontline of investor considerations.

VCTs continue as the most popular choice for investments, showcasing long and mature track records in steady growth and tax-free dividends. On the other hand, EIS tax benefits are even more flexible with returns free of capital gains tax – and the ability to defer capital gains and use carryback on income tax relief. EIS shares still held also offer Inheritance Tax (IHT) exemption after being held for a minimum of two years.

Understanding the Difference

Close to £1.2bn was raised in VCTs in the year to March 2022, with the previous year estimating that close to 4,000 companies raised £1.66bn via EIS structures. The EIS market, however, is highly fragmented in comparison with VCTs.

As an independent financial adviser Manchester would inform you – VCT investment is straightforward. Shares issued in a quoted vehicle and a single tax certificate issued to investors enable you to claim income tax relief in the shares issued a year. Whilst investors will also invest in a single company EIS offers, many seek professional advice beforehand.

Some people find the EIS process cumbersome, whilst managers want to focus on wiser deployment into opportunities to gain the best outcomes. VCTs offer a buyback mechanism which provides a way out for investors following the mandatory five-year holding period, whereas the EIS patient capital approach focusing on start-up and early-stage investments can take longer to see fruition.

Tax Reliefs

Tax reliefs available for both are only available on purchase of new shares, not stock market purchased shares. The holding period for EIS shares before tax reliefs are claimable is three years, whilst VCTs rise to 5. Tax reliefs received on shares sold before the holding periods may end up clawed back by HMRC.

Both investments allow income-tax relief of 30% on newly issued shares, with only EIS able to carry back relief to the previous tax year under certain criteria. EIS also allows for deferment on CGT on the disposal of other assets by investing profits from asset sales into an EIS fund or direct EIS shares.

At Haven IFA, we cannot point you in the direction of which you should go, but we can outline the defining features of EIS and VCTs so that you understand which is of greater benefit to your choice.

Contact the team at Haven IFA today to discover more about your investment opportunities and tax benefits via professional advice tailored to your financial standing.