15
CONCLUSIONS TO THE
MARKET OVERVIEW
For over 30 years now there has been a
government policy to use tax incentives
to encourage private investment into
smaller company shares, and EIS has
been the preferred scheme for most
of that time. Smaller companies play
a vital role in the economy but the
investment deals available are too small
for institutional investors. Therefore,
private investment plays an essential role.
And whilst the government will always be
keen to ensure that capital is genuinely
being put at risk to encourage economic
growth, the parameters for EIS qualifying
companies are perhaps more generous
than many people realise. EIS investment
does not have to be about investing in
small start-ups (although it can be). Very
well established companies with large
workforces and significant assets can
qualify and can be lower risk investments.
Despite all the rules and regulations that
are wrapped around EIS qualification and
claiming the tax benefits, the underlying
investments themselves are actually very
simple – it’s investing into the share capital
of businesses to help them expand.
This kind of smaller company investing
holds out the prospects of occasional
stellar returns, frequent steady returns
and, possibly, some total losses. It can
be a much more engaging part of an
investment portfolio when compared to
plain vanilla, mainstream fund investing.
EIS vs VCT
EIS and VCTs are often positioned as
competing sectors – after all, they are
both focused on small company investing,
offer generous tax breaks and managers
often operate funds in both the EIS and
VCT segments of the market. However,
there are significant differences as
well, and there is no reason why they
can’t both be included in a portfolio.
VCTs are sometimes focused on larger
companies and as a listed vehicle give
investors easier access, liquidity (though
this can be illusory) and more clarity on
overall investment performance. VCTs
can also pay tax-free dividends, perhaps
making them a more suitable long-term
investment vehicle (and perhaps more
suitable for pension substitution).
However, the tax breaks on offer are
not as generous as those attached to
EIS investments. Both sectors have
recently come under the microscope for
exploiting the tax breaks and not putting
capital genuinely at risk – something
the government indicated they are
concerned about in the 2014 budget.
EIS qualifying companies can have up
to 250 staff and assets of up to £15m
Investing in smaller companies has the
potential for high returns, but also
increased risk
Companies with less than 10
employees account for 95% of all UK
businesses
Smaller company shares are more
often illiquid
Investors in unquoted equity can find
they lack influence with the underlying
companies
FEATURES EIS
VCT
Maximum
Annual
Investment
£1,000,000 £200,000
Tax Relief
30% 30%
Holding Period
3 years
5 years
One Year Carry
Back
Yes
No
Dividends
Taxable Exempt
Capital Gains
Tax
After 3
years
Exempt
Deferral Relief
Yes
No
Inheritance Tax
Relief
After 2
years
No
“EIS investment is vital for
early stage companies that have
no assets or income stream to
support bank lending”
SarahWadham, EISA
POTENTIAL
FOR
SUBSTANTIAL
CAPITAL
GAINS
DIVERSIFICATION
IT’S A BUYERS’
MARKET
IT’S
INTERESTING
AND EXCITING
IT SUPPORTS
THE UK
ECONOMY
IS VS VCT
KEY POINTS
