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EIS and VCT horses for courses (FT Advisor)

by David Kaye

 

 

It is common knowledge that investors benefit from a 30 per cent upfront income tax relief on investments that qualify for the Enterprise Investment Scheme and Venture Capital Trust rules. While these government-sponsored schemes may appear similar at first glance, in detail and application they typically have very different structures.

The EIS was established in 1994 as a way of supporting smaller companies by offering attractive tax relief on investment into these businesses. This was followed in 1996 by the launch of the VCT scheme.

HM Revenue & Customs operates an advanced assurance regime for both schemes, reassuring clients as to the qualifying status of their investment – application can be made to HMRC to determine whether the intended business plan and corporate structure of the relevant EIS/VCT investee company will meet the “qualifying company” requirements.

If HMRC approves the submission, then assurance is given that shares will qualify for their respective reliefs providing the business plan is followed and the corporate structure remains consistent with the original assurance obtained.

Comparing EIS and VCTs

1. Structure:

EIS shares qualify by company, and relief is usually given on a company-by-company basis. As such, clients will often be invested into a portfolio service which allows the manager to select what they consider to be the investee companies that most closely match their stated strategy. Each company is distinct, and capital is likely to be returned on a company-by-company basis. EIS companies are typically wound up by shareholder vote and are therefore extremely illiquid. Unlike VCTs there is no secondary market for EIS shares.

VCTs are London Stock Exchange-listed vehicles which pool investors’ capital and are reported on as an individual company, although they invest in a number of different underlying investments. Seventy per cent of a VCT’s total assets have to be allotted into qualifying investments, leaving up to 30 per cent which may be invested at the manager’s discretion; “non-qualifying” holdings might include listed equities, bonds or bespoke loans/investments. Care should be taken to understand the strategy for the “non-qualifying” portfolio as it can represent a relatively large portion of the VCT’s assets. VCTs have a maximum allocation of 15 per cent to any one company, which can offer better diversification than EIS portfolio services.

2. Contribution Levels

Income tax relief is available on investments of up to £1m each tax year for EIS-qualifying shares and up to £200,000 for VCTs. An investor can put more money in, but they will not benefit from income tax relief on the excess. While VCTs are listed entities that pool investors’ capital and might be considered more diversified, more transparent and lower-risk than their EIS single company counterparts, it is perhaps surprising that the EIS allowance is significantly higher.

 

Read the full article here on the FT Advisor website.