One of the most important developments in the personal investment industry over the last 20 years has been the introduction of a range of tax incentives to encourage wider investment by individuals.
Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCT) were introduced by the government in the early 1990s to encourage investment into early stage and new companies.
Essentially, they’re tax efficient ways to invest in small and dynamic UK companies – but they’re not tax avoidance or loophole schemes.
In today’s environment, with pension limits being reached and ISAs getting full, tax efficient investment opportunities are becoming more limited. As a result, investors are increasingly considering alternative investments alongside their pensions, such as VCTs and EISs.
Venture Capital Trusts (VCTs)
VCTs are professionally managed funds which allow investment of up to £200,000 per tax year and offer income tax relief equal to 30% of the sum invested.
VCT shares are listed on the London Stock Exchange and any income and gains are tax free. To retain the initial income tax relief, however, you must hold these shares for at least five years.
Enterprise Investment Schemes (EIS)
The EIS allows you to invest up to £1million per tax year and receive upfront income tax relief equal to 30% of the sum invested. The EIS is for small unquoted companies, which tend to be higher risk and may be more difficult to sell than VCTs.
Any gains are tax-free. However, the minimum holding period to retain the tax benefits is shorter – three years – and it may be possible to defer CGT (capital gains tax) liabilities.
Seed Enterprise Investment Scheme (SEIS)
The SEIS was introduced by the government in 2011 with the aim of helping even smaller early-stage companies to raise
funds by offering very generous tax relief to investors.
The scheme allows you to invest up to £100,000 per tax year in companies that are under two years old and receive upfront tax relief equal to 50% of the sum invested.
Like the EIS, any gains are tax-free and the minimum period of investment to retain the tax benefits is three years. The SEIS can also cut capital gains tax.
What are the risks?
As with all investments, value and income can fall as well as rise and you may get back less than you invest. Because they focus on smaller companies, which can be more volatile than their larger counterparts, this risk is greater with VCTs, EIS and SEIS than with other stock market investments.
For this reason, VCTs, EIS and SEIS are long-term investments and are not for everyone. Investors should have no requirement for immediate liquidity and should be able to withstand a potential total loss.
In order to retain all the tax relief available, you must hold the investment for a minimum period and the companies must retain their qualifying status. Otherwise, you may have to pay back the income tax relief received.
So, is it worth considering these tax efficient investments?
In recent years we’ve seen the government impose greater restrictions on traditional tax havens such as pensions and ISAs. Despite this, the government has avoided reducing tax relief on investments into small and growing companies due to a fear that it may reduce investment and affect the UK’s economic growth. Consequently VCTs, EIS and SEIS can:
- Provide investors with a substantial refund on tax already paid,
- Mitigate or avoid future tax liabilities,
- Generate tax-free income/gains,
- Or a combination of these above.
These investment opportunities may not suit everybody and aren’t suitable as a substitute to ISAs or pensions, but can be complementary to them.
In order to be sure an investment opportunity is suited to you, it’s essential that you seek out relevant advice from both investors and advisers. Very few private investors have the time or experience to seek out the best investment opportunities, let alone agree the right terms and conduct effective due diligence.
That’s why CoInvestor has designed a platform which removes these barriers to enable investors, advisers and fund managers to collaborate more easily and efficiently than ever before.
The CoInvestor platform helps mitigate investment risk by letting qualifying private investors co-invest alongside experienced fund managers, demystifying a traditionally complex investment process.
For more information on alternative assets, visit: https://www.coinvestor.co.uk/.
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Investments shown on CoInvestor put your capital at risk. The investments listed are in unlisted companies which are likely to be harder to value and sell than quoted shares. Investors may not get back the full amount invested.