Prior to 6 April 2011, Venture Capital Trusts (VCTs) have proved generally more popular than Enterprise Investment Schemes (EIS) for those seeking an alternative to pension funding once the reduced income tax relief limits on pension contributions have been reached. Now that the EIS income tax reduction available has been increased from 20% to 30% of the amount subscribed to match that for VCTs, this preference is less obvious.
Also EIS investment will be attractive to those seeking to defer CGT on capital gains, which has not been available for VCTs since 2004, and does not require the 30% material interest upper limit test to be met, such as is the case if the EIS income tax reduction is also to be secured.
Those considering inheritance tax will be more inclined to opt for EIS investments as unquoted shares expected to benefit from business property relief (once held for two years), since minority stakes in listed companies such as VCTs do not qualify for BPR.
Both VCTs and EIS shares offer exemption from income tax on dividends and CGT on gains realised on their disposal (but not EIS deferred gains thereby crystallised), to the extent that the investments fall within the annual limits for income tax reduction, i.e. respectively £200,000 and £500,000. The EIS limit is expected to double to £1 million from 6 April 2012, when the qualifying company criteria affecting both VCTs and EIS will become less focussed on towards smaller entities. An individual can elect for his EIS subscription to be treated as made in the previous tax year for the purposes of claiming the income tax reduction, not available with VCTs.
In either case the extent to which perceived risk is minimised and exit opportunities are identified, within the evolving tax rules, will usually be important considerations when selecting particular investments.
Enhancements of the EIS tax benefits are increasing the attractiveness of EIS compared with VCTs, although the latter in some cases will continue to hold sway in being able to offer an exit prospect. The choice will depend on what the principal objectives are for the investor concerned. We are able to provide guidance on tax issues, in conjunction with Epoch Wealth Management who can cover the investment advice aspects and selection.
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