VCTs and EIS are clearly the most popular of the government’s Venture Capital Schemes. It’s no wonder they’re gaining further popularity. When investors have maxed out their pension and ISA contributions, they have few other options to invest in a tax-efficient manner.
Here are some of the key differences between VCTs and EIS investments:
One clear difference between EIS and VCTs is the minimum holding period for receiving tax relief. Although both VCTs and EIS are eligible for 30% income tax relief, an investor has to hold a VCT for five years to be eligible for tax relief, as opposed to three years with EIS.
However, VCT investments cannot be carried back to previous tax years, whereas EIS can be carried back to the previous year.
The maximum annual investment for VCTs is £200,000. EIS investors can invest £1m per year, which is raised to £2m if at least £1m is invested in knowledge-intensive companies.
VCTs may pay out tax free dividends to investors. Dividends from EIS, however, will be taxed.
However, one could argue that expecting early-stage companies to pay out dividends could be detrimental to their growth. Investors shouldn’t really be reliant on dividend payouts from VCTs.
It’s worth noting that both EIS and VCTs benefit from tax-free growth via 100% CGT exemption on disposal of shares.
Fund structure vs single company investments
VCTs are delivered in a fund structure, whereas investors are required to hold individual company shares with EIS investments while protecting the value of their shares by taking out shareholder protection insurance from mykeymaninsurance. However, EIS investment providers tend to offer a portfolio of investee companies to investors, so as to spread the risk.
VCTs generally operate a much bigger pool of investee companies than EIS portfolios, which can potentially increase diversification and limit investment risk.
No IHT mitigation on VCTs
EIS investments are eligible for Business Relief. This means that if the investment is held for two years, and until death, the value of the assets will not be liable for inheritance tax.
VCTs, on the other hand, do not qualify for Business Relief.
VCTs are listed on a secondary market. In theory, this means that they should be somewhat more liquid than EIS investments.
However, just because VCTs are listed on an exchange, it doesn’t mean that there will necessarily be a demand for them.
VCTs bought on a secondary market are not eligible for income tax relief, but they are eligible for tax relief on dividends.
It’s worth noting that VCTs tend to trade at a discount to their NAV (net asset value) when sold on a secondary market.