Personal Investments

Enterprise Investment Schemes & Venture Capital Trusts

These schemes have been around since 1994 and offer investors tax efficient investment opportunities.

Enterprise Investment Schemes (EISs)

An EIS is a scheme whereby certain tax benefits are granted for subscribing into qualifying shares in qualifying companies.

In EIS investor may invest a maximum of £500,000 per annum and qualify for Income Tax relief at 20%, subject of course to a liability existing. The investment must be retained for a period of 3 years, otherwise this relief will be reclaimed.

A key attraction of EIS investment is the ability to defer a Capital Gains Tax (CGT) liability within one year before the gain is crystallised or within 3 years after. The gain may be deferred for as long as the investment is held and will be realised upon encashment unless rolled over into another EIS or qualifying investment thereafter. Note that additional investment over and above £500,000 may be made for this purpose, although Income Tax relief will not be available.

Gains made within the EIS investment itself are free from CGT. Equally should a company fail or a loss is realised, the net of tax relief loss may be set against the investors income. Furthermore, investment into an EIS qualifies for Inheritance Tax (IHT) Business Property Relief (BPR).

These are attractive for investors due to the potential 60% tax relief (20% Income Tax and possible 40% CGT) available. Due to the high risk nature of these schemes, as investment is generally in unquoted shares, diversification of any proposed investment across a number of holdings would be recommended. This may be achieved by way of a portfolio or via an approved EIS fund which have come into being.

Venture Capital Trusts (VCTs)

VCTs are broadly similar to investment trusts whose shares are listed on the stockmarket. To remain qualifying investments, VCTs must invest a minimum of 70% of the funds raised into new issues of securities in unquoted companies (including those listed on the Alternative Investment Market (AIM)). Prior to that, most will invest into Gilts or deposits before the selection of suitable investment opportunities over the 3 year period.

An individual may subscribe to a maximum investment of £200,000 per annum. Since 6th April 2006, any such investment will attract 30% (previously 40%) Income Tax relief, although again a liability must first exist and the investment retained for 5 (previously 3) years for the relief to be retained. This higher level of Income Tax relief was made available at the expense of losing the opportunity to defer CGT liabilities as per EIS investments.

Investors enjoy CGT free gains upon encashment and should the trust distribute their income and gains as dividends, these are not subject to Income Tax.

From November to the end of the tax year is the traditional season for EIS and VCT launches, particularly as CGT and Income Tax liabilities become known.

EIS & VCT Comparison

*No limit on CGT deferral