Investments with up front tax relief

No doubt you are looking to supplement your trading activities with other investment income and a number of business owners that we deal with often look to put their money into various types of investments with property remaining one of the most popular options.

However, we are seeing a rise in investments made in smaller businesses, either indirectly through a Venture Capital Trust (VCT) or directly through an Enterprise Investment Scheme (EIS).

A VCT is an investment company which is broadly similar to any other investment trust but is quoted on the stock exchange with at least 70% of its assets invested in small companies that would otherwise qualify for EIS investment.  In addition, most of its income must be distributed by way of dividend. 

On the other hand, EIS investments are based around a government scheme allowing certain tax reliefs for investors who subscribe in qualifying shares in relatively small qualifying businesses with gross assets of less than £7m prior to investment. Each EIS qualifying company is unquoted and may only be involved in certain activities excluding trade such as financial, legal and accounting services including trading as well as property development, hotels, etc

As you may appreciate, an EIS investment is inherently more risky that a VCT given the investment in a single business rather than a variety although you may still be able to spread your risk using a EIS approved investment fund which looks to invest in a variety of EIS approved businesses.

In addition, you may find that should you wish to sell the EIS shares relatively quickly in the future, there may be less of a market for them as opposed to VCT shares which are openly traded on the stock exchange.

Now the best part…..

Both the VCT and EIS schemes allow for 30% income tax relief for any investors with this tax relief only being clawed back if the shares are held for less than three years (EIS) or five years (VCT). There is an annual investment limit on each of the schemes being £200,000 for VCT’s and £1,00,000 for EIS. Of course, you need not invest up to the limits shown, and virtually all schemes allow much lower levels of investment, starting from only a few thousand pounds.

Whilst the schemes are inherently similar, the VCT investment will allow for any return on your investment to be tax-free in the form of either dividends or capital gains upon sale of the shares but it does not allow for tax relief on any losses made on that investment and will also form part of your estate for inheritance tax purposes upon your death. 

EIS investments, on the other hand, do not allow tax-free dividends but do allow tax-free capital gains to be made on the sale of the shares provided the shares are held for at least three years.  In addition, should you make a loss on the shares, you will be able to claim for a capital gains loss to be offset against other gains made if the shares have been held for at least three years, and they do not form part of your estate upon your death.

Both forms of tax-efficient investment can be a valuable addition to any investment portfolio that you may wish to hold and should you wish to discuss your options with regard to these investments, we would be happy to introduce you to an Independent Financial Adviser who would be able to advise you further.

Investments of this nature should be made with the advice of an independent financial advisor who is able to advise you with regard to the performance, or likely performance, of each investment. The full tax relief shown above is only available should you have income levels significant enough to cover your investment made in that tax year.

For further information, give a member of our team a call on 01474 (853856)