EIS guide

21 RISKS AND REWARDS There are some notable differences in how the tax reliefs available with EIS compare to those available through VCTs (the other major tax- advantaged venture capital scheme in the UK). • Income tax relief is subject to a five- year minimum holding period with VCTs, compared to a minimum of at least three years with EIS (although realistically the holding period is likely to be much longer). • Unlike EIS, VCT investment cannot be carried back to previous tax years. • There is no loss relief, CGT deferral relief or IHT relief with VCTs. • VCTs can pay dividends tax-free, EIS cannot. • Both VCTs and EIS investments are not subject to CGT on capital gains made (subject to certain conditions). With a VCT, income tax relief is claimed at the point at which the funds are invested in the VCT. This is also treated as the starting point for the minimum holding period. This is different from an “unapproved” EIS fund (which comprise most EIS funds), where the reliefs and associated minimum holding periods apply each time the manager invests a proportion of the clients’ fund in an underlying investee company. RISKS AND REWARDS 20 Comparison: EIS and VCT VCT EIS portfolio/fund INCOME TAX RELIEF 30% 30% MINIMUM TERM 5 years 3 years LIKELY INVESTMENT HORIZON 5-10 years 5-10 years MAXIMUM ANNUAL INVESTMENT ELIGIBLE £200,000 £1m plus £1m carry back (and from 6 April 2018, max £2m where at least £1m is invested in knowledge-intensive companies) DIVIDENDS Tax exempt Taxed CAPITAL GAINS Tax exempt Tax exempt CGT DEFERRAL No Yes LOSS RELIEF No Yes LIQUIDITY Up to 20% of the VCT’s assets (up to 30% for accounting periods ending before 6 April 2019) may be held in cash, or certain other liquid assets. VCT managers often offer share buyback schemes but usually at a discount to NAV and they are not guaranteed. VCTs’ shares are not widely traded and usually trade at a discount to their NAV. There is no large-scale active secondary market in unquoted shares and EIS managers do not offer buy-backs. Investors should regard themselves as locked in to the shares until the underlying company either lists on a recognised stock exchange, achieves a trade sale, or the company is wound up. AIM listed EIS-qualifying shares have the potential for faster disposal. DIVERSIFICATION 30-60 companies 4-15 companies IHT RELIEF No 100% after 2-year holding period TARGET DEPLOYMENT TIMELINE 1 - 6 months unless there are fixed allotment dates for each tax year 12 - 24 months Subject to conditions being met. EIS and other tax wrappers EIS AND PENSIONS An investor may wish to use an EIS portfolio to complement existing pension and retirement planning strategies. However, it should be remembered that an EIS portfolio (which invests in what most would classify as high- risk companies) should NOT be considered as a replacement for pension investments, which will typically be lower risk. Additional rate taxpayers (those who earn more than £150,000 per year) have their annual pension allowances reduced by £1 for every £2 extra income earned. For those earning over £210,000, their annual pension allowance is capped at £10,000. If an investor exceeds the annual allowance in a year, they won’t receive tax relief on any contributions that exceed the limit and will be faced with an annual allowance charge. High earners may be concerned that they can’t get enough money into their pension as a result of this restriction. In this situation, an investment into an EIS portfolio alongside the pension could provide an appropriate longer-term and tax-efficient investment. ANNUAL PENSION CONTRIBUTIONS ALLOWANCE £150,000 £154,000 £158,000 £162,000 £166,000 £170,000 £174,000 £178,000 £182,000 £186,000 £190,000 £194,000 £198,000 £202,000 £206,000 £210,000 £40,000 £35,000 £30,000 £25,000 £20,000 £15,000 £10,000 £5,000 £0 Pension contributions Annual salary