Venture Capital Trusts and Enterprise Investment Schemes – tax breaks explained.
Venture Capital Trusts and Enterprise Investment Schemes – tax breaks explained.
Investing in new and usually unquoted companies offers a number of tax breaks for investors in venture capital trusts (VCT’s) and the enterprise investment scheme (EIS).
It is often an overlooked fact that both VCTs and EIS tax-advantaged investments have been extended to 2035. The Chancellor confirmed the extension earlier this year and that it was called the ‘sunset clause.’
Both VCT and EIS investments were established in 1995 and after a bit of a slow start they have changed considerably and are fast becoming a small but significant part of many high net worth clients’ financial planning.
The 2022/23 tax year saw, for the second tax year in a row, the amount raised by venture capitalist organisations exceed £1bn, and EIS investment in excess of £2bn.
Investment in young private equity, via VCT and EIS investment has been described as a most generous tax incentivised scheme with 30% income tax credit for every £1 invested; exemption of capital gains tax; tax-free dividends for VCTs; and IHT exemption for EIS investment being unrivalled.
Very recently, qualifying technology companies have benefited from changes permitting investment in companies employing up to 500 people that have been trading for up to 10 years, rather than the limit of seven years of trading that otherwise applies.
Gone are the days when money would be invested in very early-stage businesses, which still carried enormous operational risk. Instead, the market opportunity for well managed businesses with disruptive technologies vastly exceed the prospects of most young companies a generation ago.
VCTs and EISs are considered high risk and are usually only appropriate for investors with specific circumstances as you may not get back what you put in. Past performance is not a guide to future returns. For the right audience however, they remain a very valid piece of the financial planning jigsaw.
Tax rules may change, and we would be pleased to chat through with any individuals looking to invest in a new innovative business.