EIS and VCT are investment vehicles which encourage investment in small, unquoted trading companies in their early stages, who are typically trying to raise capital.
These initiatives benefit the economy by promoting innovation amongst the small higher-risk business community, which in turn drives productivity, creates jobs and boosts economic growth.
Since their launch in the 1990s, they have become popular features on the investment landscape. Both schemes still provide an attractive proposition for experienced investors today, looking for the chance to invest in new businesses with the added benefit of portfolio diversification.
High volume of inflows to the small business sector
The schemes have proved successful in terms of generating cash for the small business sector. Data shows since their launch in 1994, over £20bn of funds have been raised through the EIS scheme, with 29,770 individual companies benefiting from investment. VCT have had a similarly positive impact, raising £8.4bn of funds since their creation in 1995.
How do they work and how much can I invest?
In the case of the EIS, investors typically purchase shares directly in firms. VCT are listed companies that allow investors to spread the investment risk over a number of companies by subscribing for shares in the VCT itself (a similar approach to investment trusts).
Currently both EIS & VCT offer 30% income tax relief and tax-free capital growth, provided an EIS investment is held for at least three years and a VCT for five years.
The maximum amount anyone can invest in an EIS is £1m per tax year, or £2m, as long as at least £1m of this is invested in ‘knowledge intensive’ companies. Individuals can invest up to £200,000 each fiscal year in new shares issued by a VCT.
While there are plenty of benefits associated with these schemes, they are only suitable for investors who are comfortable holding high-risk investments. This enhanced risk element stems from the fact that EIS and VCT invest in small, fledgling enterprises.
Although some of these companies will flourish and deliver strong returns, some will fail. As a result, these schemes have a high-risk profile, which is something any prospective investor needs to carefully consider. EIS and VCT investments are only suitable for a relatively small proportion of an investor’s overall portfolio. As these schemes invest in small companies with shares that are illiquid, they can be hard to sell.
As long as the risks are fully understood, these schemes are worth considering for investors seeking a long-term investment that maximises tax-efficiency and provides portfolio diversification.
HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes, which cannot be foreseen.
The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.