In this article we take a look at the attractions of investment in Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCT) as part of an investor’s end of tax year planning.
Enterprise Investment Scheme (EIS)
The Enterprise Investment Scheme (EIS) is a Government initiative to encourage investment in smaller unquoted companies.
There are five current EIS tax reliefs: –
- Income tax relief – provided an EIS qualifying investment is held for no less than three years an individual can reduce their income tax liability by an amount equal to 30% of the amount invested up to a maximum per investor is £1m per annum.
- Capital Gains Tax Deferral Relief – tax on gains realised on a different asset can be deferred indefinitely. In order to qualify for this relief the investment in EIS shares must be within a period of 12 months before and 36 months after disposing of the original assets. Deferral relief is unlimited, in other words, this relief is not limited to investments of £m per annum.
- Capital Gains Tax Freedom – no CGT is payable on disposal of shares after three years provided the EIS initial income tax relief was given and not withdrawn on those shares.
- Loss Relief – if EIS shares are disposed of at any time at a loss (after taking into account income tax relief), such losses can be offset against the investor’s capital gains or income in the year of disposal or the previous year.
- Inheritance Tax Exemption – EIS investments are generally exempt from IHT after two years of holding the investment.
The tax benefits of an EIS are only available when new shares are bought. If the existing shares of an EIS-eligible company are bought on the secondary market then none of the tax breaks are available via EIS.
The Seed EIS scheme offers a different form of reinvestment relief for investors who subscribe for shares in small start-up companies. For 2013 /2014, the maximum qualifying investment is £100,000. Up to one half of the amount investment may be offset against a capital gain made in the year to reduce the CGT payable. This is a permanent tax saving provided that the Seed EIS shares are retained for at least three years.
Alternatively, in the case of an investment made in 2013 / 2014, some or all of the relief may be carried back to 2012 / 2013, and set against gains in that year. The whole of the sum invested (and not just one half) may be set against those gains, subject to the cap of £100,000.
The investment in Seed EIS shares also attracts income tax relief at 50% of the sum invested. This rate of tax relief is given regardless of the rate of income tax paid by the investor, subject to tax relief being capped at the total paid in the year. The carry back facility outlined above applies to income tax as well as CGT.
Venture Capital Trusts (VCTs)
VCTs are specialist tax incentivised investments that enable individuals to invest directly in a range of small higher risk trading companies and securities. VCTs are companies in their own right and, like investment trusts, their shares trade on the London Stock Exchange.
Shares in qualifying VCTs offer the following tax incentives: –
- Up front income tax relief at 30% of the amount subscribed, subject to a maximum investment of £200,000 per tax year. The investment must be held for a minimum of 5 years in order to retain the income tax relief. Note that income tax relief on the purchase of VCTs is available only where new shares are subscribed, and not to shares acquired from another shareholder.
- Dividends received on VCT shares are income tax free (including shares acquired from another holder).
- Capital gains tax exemption on the VCT shares (including shares acquired from another holder), but note CGT deferral is not available unlike for EISs.