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Personal tax  •  Personal Taxation  •  Tax Planning  •  Tax Relief

The tax benefits of investing in EIS and VCT companies

By RJP LLP on 20 July 2021

Venture capital trusts (VCTs) and the Enterprise Investment Scheme (EIS) have been available for many years, and they remain as tax efficient now as they have always been. There are risks for investors getting involved with either of these schemes, but provided you take financial advice to understand these fully and have the financial flexibility to invest in the types of companies they are aimed at, they offer good tax advantages such as a reduction in income tax liability, potential tax free growth in value, and the opportunity to hold over other capital gains.

Given that personal allowances have been frozen and there will be many more taxpayers in the additional rate income tax bracket in coming years, it is worthwhile understanding these benefits.

Tax advantages of EIS

Provided the shares are held for at least 3 years, and remain qualifying shares during this period, the following reliefs are available:

  • Income tax relief of 30% provided you have sufficient income tax liability to cover this;
  • No capital gains tax payable on disposal, saving up to 20% for higher rate taxpayers;
  • Potential qualification for business property relief if held for 2 years, meaning they will not attract inheritance tax (otherwise 40%).
  • Capital gains made elsewhere within a specified time period can be deferred by investing proceeds into an EIS;
  • If the EIS investment is ultimately loss making, the losses can be used to reduce your tax bill.

Tax advantages of VCTs

VCTs have similar advantages. Investors can claim income tax relief of 30%; in this case provided the shares are held for five years; no capital gains tax payable on disposal; and dividends received are tax free making them a good potential option for retirement income.

Unlike ISAs which provide a tax efficient shelter for earned income, EIS and VCT investments reduce income tax liabilities at the time of investment. If you have an income tax liability of £30,000 this can potentially be reduced to zero if you have the means to invest sufficient funds into an EIS or VCT. Clearly this is not appropriate for every taxpayer but there is a growing number for whom it is relevant.

If you are interested in learning more about the tax treatment of EIS and VCT investments to reduce your income tax bill, or if your company is seeking EIS registration, contact partners@rjp.co.uk.

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