Comparison of EIS & VCT
EIS’s, BPR, SEIS’s and VCT’s invest in assets that are high risk and can be difficult to sell such as shares in unlisted companies. The value of the investment and the income from it can fall as well as rise and investors may not get back what they originally invested, even taking into account the tax benefits.The value of pensions and investments can fall as well as rise, you may get back less than you invested. Tax treatment varies according to individual circumstance and is subject to change.
Background
EIS, SEIS and VCT were introduced to provide incentives to individuals to invest in small unquoted companies, which are generally perceived to be higher-risk investments.
Who typically invests in EIS & VCT schemes and why?
Typically, higher net worth people invest in VCT & EIS schemes, i.e. those people who pay high levels of income tax, as well as those with material Capital Gains. However, there are other reasons to invest in these asset classes, which are outlined below.
Why should you reach out to us for advice?
We have a highly qualified professional with extensive industry experience and relevant qualifications. Over the years, Alex has developed strong relationships across the industry and is able to source the most suitable investment for you, in line with your financial goals and tax requirements.
| TAX ASPECTS | VCT | EIS |
| Income tax relief | Income tax relief is available at 30% of the amount invested in new shares (maximum annual investment of £200,000). It is not possible to carry back a VCT subscription to the previous tax year. Dividends in respect of shares qualifying for income tax relief are themselves exempt from income tax. | Income tax relief is available at 30% of the amount invested in new shares (maximum annual investment of £1 million). By election, where an investment is made in one year, it can be treated as though it was an investment made in the immediately preceding tax year, subject to the overall limit for that year. Dividends received on EIS shares are subject to income tax in the usual way. |
| Income tax relief withdrawn | Income tax relief can be clawed back if the VCT shares are sold or the VCT loses its approved status within five years of issue. The claw back is the lower of: • Original income tax reducer; and • 30% x sale proceeds received |
Income tax relief can be clawed back if the company fails to meet certain qualifying conditions throughout the three years from the later of the investment or the date the company starts to trade. It may also be clawed back if the investor becomes “connected” with the company, if the investor receives value from the company, or if the shares are sold, within the same three year period. The claw back is the lower of: • Original income tax reducer; and • 30% x sale proceeds received. |
| Capital gains tax (CGT) exemption | The disposal of VCT shares is exempt from CGT providing full income tax relief was given on the subscription. | The disposal of EIS shares after three years is exempt from CGT providing income tax relief was given on the subscription and has not been clawed back. |
| Relief for capital losses on disposals | Losses are not allowable. | Providing certain conditions are met, losses arising on the disposal of EIS shares – after the deduction of any income tax relief given and not clawed back – can be used against either income or capital gains. |
| Deferral relief / Reinvestment relief | VCT deferral relief is not available for investments made after 5 April 2004. | relief CGT arising on the disposal of any asset can be deferred by subscribing for qualifying EIS shares, in the period from one year before to three years after the disposal of the original asset. The deferred gain will usually come back into charge on the disposal of the EIS shares. |
| Business property relief | Shares in VCTs do not qualify for business property relief for inheritance tax purposes. | Shares in EIS companies held for at least two years will normally qualify for 100% business property relief for inheritance tax purposes. |
| TAX ASPECTS | VCT | EIS |
| INCOME TAX RELIEF | 30% | 30% |
| MAXIMUM PERSONAL INVESTMENT PER TAX YEAR | £200,000 | £1,000,000 for income tax relief, no limit for CGT deferral relief |
| TAX RELIEF CLAWBACK | No | Yes, up to 100% of investment. |
| CGT REINVESTMENT RELIEF | No | Yes, deferral for gains made up tp 1 year before/ 3 years after EIS investment |
| INVESTOR CAPITAL GAINS TAX LIABILITY | Nil at any time | Nil after 3 years, except for deferred gains |
| DIVIDENDS | Tax-free | Taxable |
| IHT BUSINESS RELIEF | No* | Yes, after 2 years |
* Inheritance tax: the shares would qualify for 50% IHT business relief in the unlikely event of the investor having a controlling shareholding provided they have been owned for at least 2 years
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