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Individual Savings Account (ISA) Guide

Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCT)

For those high earners and those with well-funded pension schemes the reduction in the pension lifetime allowance and reducing caps on pension contributions is inevitably making tax efficient investment harder. However, the government has improved the tax breaks and investment limitations on EIS and VCT investments which is giving them a wider appeal.

As the titles suggest, these type of investments are only appropriate for those higher net worth individuals who are also prepared to accept a higher level of risk with part of their capital. Additionally, in order to qualify for the tax breaks associated with the investments one needs to commit the capital for either three or five years.

EIS

Enterprise Investment Schemes were introduced by the government to encourage individuals to invest in small unquoted companies, which typically involve a higher degree of risk than investment in larger companies and those traded on the main market of the London Stock Exchange.

Providing the underlying investments made by the EIS are held for at least three years, the current tax reliefs available for qualifying investors are:
  • 30% upfront income tax relief (up to a maximum investment of £1 million for the 2012/13 tax year or £500,000 for the 2011/12 tax year)
  • 100% inheritance tax relief after two years (provided the investments are held at time of death)
  • Capital gains tax deferral for the life of the investment
  • Tax-free growth (provided income tax relief has been given and not withdrawn)
Investors can claim income tax relief for the tax year in which they invest in the underlying companies, or the tax year immediately preceding the investment, or a mixture of both. Carry back to the 2011/12 tax year will be subject to the maximum investment limit of £500,000; so if you invested £1.5 million in May 2012, you could receive 30% income tax relief on £1 million for 2012/13, and additional income tax relief for the other £500,000 for 2011/12.

The EIS is an extremely tax efficient investment option for the right client but they are typically high risk by the nature of the companies into which the scheme invests. It is essential that you understand the risks involved. EIS is an unregulated investment scheme so it is therefore essential that investors receive advice, preferably independent advice, through an appropriate firm that is both qualified and authorised by the Financial Conduct Authority.

VCT

The Venture Capital Trust scheme was introduced on 6th April 1995. It was designed to encourage individuals to invest into smaller companies whose shares and securities are not listed on the main stock exchange.

VCTs are themselves listed on the London Stock Exchange and provide capital finance for small, expanding companies with the aim of making capital returns for investors. They are a tax efficient way to invest into smaller companies. Money raised from individual investors is pooled by the VCT to acquire a number of different investments with the aim of spreading risk across the VCT’s portfolio. Tax relief is received up front by individuals who subscribe to the issue of new VCT shares, and these shares need to be held for five years in order to retain the initial tax reliefs (VCT shares issued in earlier years had to be held for only three years).

To retain Government approval as a VCT, 70% of its investments (by value) must be held in ‘qualifying holdings’ – that is shares or securities in companies that meet the conditions of the scheme.

Investors with large income tax liabilities can invest up to £200,000 a year and receive tax relief on the investment. The minimum investment can be as low as £5,000, which means that VCTs are available to most investors.

Tax reliefs are only available to individuals aged 18 years or over and not to trustees or companies that invest in VCTs. You have to hold a new VCT investment for a minimum of five years to benefit from the tax reliefs:
  • Income tax relief at the rate of 30% on the amount subscribed for the shares, available on investments up to £200,000 in a tax year
  • Exemption from income tax on dividends paid by the VCT
  • Exemption from CGT on disposal of the shares
Both types of investment are appropriate for a number of applications but specialist advice is always required. There are an increasing number of opportunities to invest in EIS and VCT investments with the greatest number of opportunities arising between January and the end of March each year to coincide with the end of the financial year on the 6th of April. If you would like to know more about how these investments may be appropriate as part of your investment strategy or to help mitigate inheritance tax please do not hesitate to contact us.
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