For over twenty years, Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCTs) have supported the growth engine of the British economy: smaller companies.
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 start-ups with an opportunity to raise funds.
Since the EIS was launched in 1993 the structure has allowed nearly 30,000 SMEs to benefit from over £20 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. Start-ups 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, while any growth is tax free. In addition, profits earned on EIS shares are exempt from capital gains tax if held for at least three years.
VCTs were introduced in 1995 and in December 2020, assets managed by VCTs surpassed £5 billion1. Investor demand remains high as during 2020 £685 million was raised for SMEs through VCTs2. Although 2020 was a challenging year, the overall resilience of VCTs is remarkable; most VCTs have maintained their dividends since the pandemic, an important source of tax-free income for their investors. 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?
In an environment where more and more people are finding access to pensions restricted by the lifetime and tapered annual allowances, VCTs offer an excellent alternative, while EIS provide 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. Our dedicated Tax Efficient Investments Team are on hand to select the most suitable option for each individual and answer any questions.