Tax efficient investments

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Venture Capital Trusts (VCT)

A Venture Capital Trust (VCT) is a company listed on the stock market that subscribes for shares in small unquoted companies.  Some of those small companies may fail, some may be very successful. Overall, due to the investment being in a high number of businesses, the investment risk is reduced, and the risk is balanced out for the VCT investor.

VCTs have a number of tax advantages for the investor:

  • The investor can claim a credit to their tax bill equal to 30% of the amount invested (this tax credit is reversed if the shares are not held for 5 years)
  • Dividends received from VCTs are exempt from income tax
  • Capital gains made on the disposal of VCTs are exempt from capital gains tax after 5 years

There is a ceiling of £200,000 that can be invested each year. Any more than that and the tax reliefs noted above are denied on the excess invested.

The tax credit cannot generate a repayment of tax. So if your tax bill is only £3,000 for the year then you don’t gain any tax credit advantage if investing over £10,000.

The 5 year claw back of relief effectively ties you in for 5 years, making the investment fairly illiquid. There is however a market in selling shares in VCTs so it is possible to realise your investment at any time you chose.

VCTs are required to distribute at least 85% of their income each year, making them good dividend vehicles, many target a dividend return rate of 5% annually, but potentially they are not high growth investments (on balance).

Enterprise Investment Scheme (EIS)

An EIS investment is a direct investment into a small, often start up, company. Various companies act as the middle man connecting the companies to potential investors. There is a high risk of loss associated with EIS investment and many of the companies can fail. EIS tax favourable schemes were introduced by HMRC to help these small high risk companies raise funds.

Dividends from EIS investments are taxable as normal, but generally the companies do not pay dividends, as they do not have profits to distribute. The return to the investor is commonly generated when/if the company is successful and the shares are acquired from the investor on a company sale. Due to there being no market in the companies’ shares, these investments are highly illiquid.

Due to the high risk HMRC have introduced lots of tax advantages to encourage investment:

  • The investor can claim a credit to their tax bill equal to 30% of the amount invested (This tax credit is withdrawn if sold within 3 years).
  • The tax credit noted above can be carried back to the previous tax year enabling some post tax year end planning to reduce tax liabilities.
  • Any capital gains made on the disposal of the EIS investment is exempt from capital gains tax after 3 years.
  • Capital losses made at any time are allowable and can be converted into an income tax loss to offset against other income and obtain tax relief.
  • Capital gains deferral relief can also be obtained. This relief defers capital gains tax payable on the sale of any asset when investing in an EIS investment. So a £50,000 capital gain can be avoided by making a £50,000 EIS investment. The tax bill is just delayed and pops out again when the EIS itself is sold. The investment doesn’t have to be made in the same tax year as the gain.
  • Investments in EIS companies are exempt from Inheritance tax

There are annual limits on the amount that can be investment into EIS companies in any tax year, currently £1M, or up to £2M if investing in “knowledge intensive” companies.

Seed Enterprise Investment Scheme (SEIS)

These investments are similar to EIS but in to smaller, even higher risk, companies.

The tax advantages are as EIS above but with the benefit of a 50% tax credit (rather than the 30%).

Additionally the capital gains deferral is a permanent mitigation of tax on a capital gain, rather than just a delaying it.

The limits for SEIS investments are far lower than for EIS at only £100,000 per year.

We cannot offer advice on whether any of the above are good investment products, but we can offer advice on the tax implications of any purchase or sale of these investments. If you would like any advice on the tax benefits please contact Ellis & Co on 01244 343504.