They are also one of the few areas of investment where government willingly offers generous tax reliefs, both on the initial investment and on the proceeds of qualifying investments.
Seed Enterprise Investment Schemes (SEIS) were launched in April 2012 to further this initiative by specifically providing startups with an opportunity to raise funds.
EIS
Since the EIS was launched in 1994, the structure has allowed nearly 30,000 small- to medium-sized enterprises (SMEs) to benefit from nearly £30 billion in investment capital***. Investment into the EIS market has steadily increased since 2010 despite several changes to the eligibility criteria for the underlying companies. Startups and early-stage businesses carry greater investment risk than larger, more established companies and so the Government designed the EIS to be tax efficient and therefore more attractive to investors. Investors into EIS-eligible companies can get up to 30 per cent income tax relief. For example, investing £10,000 could get you up to £3,000 back on your tax return. Where EIS shares qualify for income tax relief and are held for at least three years, profits are also exempt from capital gains tax.
VCTs
VCTs were introduced in 1995 as an ‘attractive long-term investment’ and the amount of funds raised has increased nearly every year – with the 2021/22 tax year raising £1.12 billion*. Investor demand remains high – during the 2023/24 tax year £882 million was raised for SMEs through VCTs**. Many household names have received VCT funding during their lives, including Zoopla (the first VCT-backed £1 billion company), Five Guys and Secret Escapes. In addition to offering generous tax benefits and exciting investment opportunities, VCTs meet high standards of transparency and governance, while their closed-ended format ensures an appropriately stable pool of capital.
What are the benefits of investing?
Building a diversified portfolio is an important part of a well thought out wealth management strategy. Therefore, VCTs offer an excellent platform to invest in, albeit with high risks. Meanwhile, the EIS provides a generous cocktail of tax reliefs. EIS and VCT strategies allow investors to access a wide array of exciting, early-stage opportunities. However, with so many companies and funds to choose from, many of which are exceptionally high risk, at Mattioli Woods we take great care to recommend EIS, SEIS and VCTs that are appropriate to the needs of our clients.
Important information
As with all investments, your capital is at risk. The value of your investments and the income from them may fall or rise and there are no guarantees. Past performance is not a guide to future returns. SEIS and EIS are only available to qualifying investors. Tax treatment of investments and income depends on an individual’s circumstances and may be subject to change in future. The content of this article is for information only and does not constitute advice.
All content correct at time of writing (December 2024).
This article was written by Wealth Management Consultant Andrew Goulter.
