Venture Capital Trusts (VCTs) and the Enterprise Investment Scheme (EIS), are high risk investments which in certain scenarios could work well for individuals depending on their personal circumstances. However, there are a number of factors to consider before making the decision to put your money into either of these forms of investment as there are significant risks involved.
A VCT is a company trading shares on the London stock market, with the aim of making money through investing in other companies. VCTs usually invest in small companies who are looking for investments which will help their business grow. An EIS operates in a similar way, in so far as they were set up to encourage direct investment in the same sort of small companies as those invested in by VCTs.
As an incentive to investors, both VCTs and EIS offer tax breaks for any money invested. VCTs currently offer Income Tax relief at the rate of 30% on investments of up to £200,000 per tax year. EIS investments also offer 30% relief on Income Tax up to a maximum of £1,000,000 per year, meaning a potential for income tax relief of up to £300,000 per year.
There are issues to be aware of before you do anything.
The level of risk involved with both VCTs and EIS is higher than a standard collective investment. This means that you should be fully prepared to get back less money than you invested. If you really can’t afford to lose the money you put in, then a VCT or EIS is unlikely to be the right investment choice for you. Similarly, you need to be mindful of your overall risk level, something which your adviser will discuss with you often.
VCT and EIS investments are also generally ‘illiquid’, meaning you may not be able to easily get your money back to invest elsewhere or you may incur a significant loss in the value of your investment in doing so. A further issue is in concentration: as VCT and EIS investments are likely to be in niche markets, your portfolio may suffer from exposure to the risks of an isolated sector. In addition, you will need to keep the VCT or EIS for a qualifying period otherwise you will be required to pay back any tax benefit you received and the value of investments within an EIS may be subjective and a matter of opinion.
VCT and EIS are specialist investments and are only suitable to specialist investors, who understand the risk involved, do not need access to the money in the short to medium term and accept there is a significant chance they may get back less than they initial invested.
Please note that in order to claim tax relief you must have paid a sufficient amount of tax in the first instance. In addition, the EIS and VCT must remain “qualifying” in order to maintain their tax status in order for you to retain your tax relief. If for some reason the scheme became un-qualifying, then HMRC will reclaim any tax relief.
VCT and EIS have complex charging structures and a high initial change. You should read all the terms and conditions prior to investing in a VCT or EIS so you fully understand the charges involved.
If you have any questions around either VCT or EIS investment and how they may be appropriate investments to hold within your own portfolio, please feel free to get in touch with your normal Creative Financial Planner, or email us on email@example.com.