It was an oft overlooked fact that both Venture Capital Trusts (VCTs) and the Enterprise Investment Scheme (EIS) tax-advantaged investment would cease in just two years’ time, so it has caused some not-inconsiderable relief and euphoria within the VCT and EIS industries that the Chancellor has confirmed that what was called the ‘sunset clause’ has been extended to 2035.
Both VCT and EIS investments were born in 1995 and, much like a petulant infant, they experienced all manner of challenges in their early years. However, the characteristics of VCT and EIS investment have changed (almost) out of all recognition and are fast becoming a small but significant part of many high-net-worth clients' financial planning – the 2022/23 tax year saw, for the second tax year in a row, the amount raised by venture capitalist organisations has exceeded £1 billion[1],[2], and EIS investment in excess of £2 billion[3].
Investment in young private equity via VCT and EIS investment has been described as the world’s most generous tax incentivised schemes and justifiably so – a 30% income tax credit for every £1 invested ; exemption of capital gains tax; tax-free dividends for VCTs; and IHT exemption for EIS investment is unrivalled.
It is therefore clear that supporting such young private equity is a fundamental commitment by the Government. Some few years ago, the qualifying conditions were substantially relaxed, permitting investment in companies employing up to 250 people rather than the previous 50 people; and more than doubling the level of net assets a company may hold at the point of investment from £7 million to £15 million. Very recently, qualifying technology companies have benefited from even greater relaxations permitting investment in companies employing up to 500 people and that has been trading for up to ten years old, rather than the limit of seven years of trading that otherwise applies.
It is quite incredible to think that in the early years of VCT and EIS investment, few of us were using the internet, and globalisation was still a work in progress. Accordingly, the enormous tax benefits tended to create more investment than good opportunities, inevitably resulting in some disappointing performances. That has now all changed and in recent years we have been witnessing an explosion of innovation, partly driven by the need to find solutions to climate change, but also because we are in an age of ever faster technological innovation. VCT and EIS managers, while not perhaps ‘spoilt for choice’ certainly have a much wider choice of what enterprises to invest in.
Gone are the days when money would be invested in very early-stage businesses, which still carried enormous operational risk. Instead, the market opportunity for well managed businesses with disruptive technologies vastly exceed the prospects of most young companies a generation ago, although Amazon, Apple and Microsoft might be cited as extreme examples of this shift in opportunity.
The world is changing fast and needs to change fast. Investing in young and typically unquoted companies, but which have gone past their gestation phase and are growing strongly, is an investment that should rightly form a small but significant part of a diversified investment portfolio, and which also offers the invaluable benefit of having little correlation to mainstream markets in these very challenging times. VCTs and EISs are considered high risk and are usually only appropriate for investors with specific circumstances. For the right audience however, they remain a very valid piece of the financial planning jigsaw.
VCTs and EISs are considered high risk and you may not back what you put in. Past performance is not a guide to future returns.
This article has been produced for information purposes only and is not intended to be an invitation to buy or act upon the comments made. All investment decisions should be taken with advice, given appropriate knowledge of the investor’s circumstances and one must satisfy certain investor criteria before being considered eligible to invest. Any forward-looking statements and forecasted returns represent the current views of Mattioli Woods plc and may be subject to change. Tax rules may change.
All content correct at time of writing (February 2024).
[1] https://www.theaic.co.uk/aic/news/commentary/the-return-of-vcts
