VCT And EIS – Alternative Tax Efficient InvestmentsWritten on August 2, 2018 by Kirk Rice LLP
The Question:
I can no longer pay into a pension as I have fixed protection 2016. I would still like to invest tax efficiently; would a Venture Capital Trusts (VCT) or Enterprise Investment Schemes (EIS) be suitable?
Kirk Rice LLP answers:
Both Venture Capital Trusts (VCT) and Enterprise Investment Schemes (EIS) will qualify for tax relief and in this sense, they would be suitable. However, investing for tax relief alone is not sensible or recommended, the investment needs to be suitable specifically for you.
The first point to understand is that VCT & EIS especially, would be considered high risk and illiquid. hey will both qualify for 30% income tax relief (you can only claim income tax relief up to the level of tax you pay). The tax relief will be repayable if the investment is not held for a minimum period; for a VCT this is 5 years and for an EIS it is 3 years. Both are exempt from Capital Gains Tax (CGT).
VCT’s will invest in smaller companies that are VCT qualifying. The companies they invest in must be unquoted, but can include shares listed on the Alternative Investment Market (AIM), but not the London Stock Exchange. A new VCT is unlikely to pay dividends, but as the companies it invests in grow it may do so in future. In this instance, any dividends are paid tax free.
EIS’s invest in EIS unquoted qualifying smaller companies, and the EIS qualifying rules can mean these will be smaller than VCT qualifying companies and even include early stage companies. As a result, there is a higher risk of one or more failing. On the plus side, for an EIS you can claim loss relief for any that do fail thus reducing your income tax liability. The combination of the initial income tax relief and loss relief means the maximum amount a higher rate tax payer could lose is 42% of the initial investment. An additional advantage of EIS’s is they can be used to defer capital gains tax arising on disposal of any other assets. A good example here may be upon the sale of a buy to let property. Capital gains tax can be deferred on a gain realised up to 3 years before the EIS investment is made, or up to 1 year after. The gain will become payable in the year the EIS is sold, but the selling of the EIS could potentially be spread across several tax years to maximise the use of your annual CGT exemption.
VCT and EIS’s do fall under the category of tax efficient and the above tax incentives are the governments way of trying to encourage investment in small UK businesses. But, you need to be clear about the risks, and as I mentioned earlier investing for tax relief alone is not advisable, the investment needs to be suitable for you. So, do get further advice if you are considering an investment in one or both.These are complex, higher risk financial products which can be difficult to sell/realise the capital from in future. They will generally only be suitable sophisticated and/or high net worth investors.
Any reader interested in discussing this topic further can telephone Peter Sharratt on 01344 875 000 in our or email info@kirkrice.co.uk.
Want to keep updated on tax, investments, pensions & more?
If you want to keep your finger on the pulse, sign up to our fortnightly newsletter now.
DOWNLOAD OUR FACTSHEETS |
VENTURE CAPITAL TRUSTS |
ENTERPRISE INVESTMENT SCHEME |
Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made. Tax treatment is based on individual circumstances and may be subject to change in the future. Information is based on our current understanding of taxation legislation and regulations. Any levels and bases or, and reliefs from taxation, are subject to change. The Financial Conduct Authority does now regulate tax planning.
Recent Posts
-
Corporate tax planning: what it is, why it matters, and how it can support your businessWritten on October 14, 2026 by Kirk Rice LLP
-
Career Story – Rebecca EvansWritten on October 9, 2026 by Kirk Rice LLP
-
VAT Compliance: What Every SME Should KnowWritten on October 7, 2026 by Jonathan Swarbrick
-
6 Things to Know About Tax on Extra Income: Second Jobs, Freelance Work, & MoreWritten on October 5, 2026 by Jane Page
-
Business Valuation – Where Do I Start?Written on October 2, 2026 by Kirk Rice LLP
