EIS and VCTs: Help your clients achieve their long-term investment goals

11 March 2024

Sponsored article

For professional advisers and paraplanners only. Not to be relied upon by retail investors.

By Octopus Investments

Venture capital investing involves backing early-stage businesses with high growth potential.

This type of investing was made accessible to retail investors through the introduction of the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs), which also bring valuable tax reliefs to compensate for some of the risks involved.

The tax benefits, combined with the potential for high investment returns, can provide a complementary solution to suitable clients and allow advisers to grow their business beyond the traditional offerings.

What is EIS and who is it suitable for?

An EIS portfolio managed by a specialist fund manager offers investors direct ownership in the shares of 10-20 early-stage companies targeting high growth over the long term.

Let’s look at a client example.

David, 50, is enjoying a successful career and is a high earner. He earns a salary of £170,000 and a sizeable yearly bonus on top, which this year is £120,000.

David usually invests part of this bonus in long-term investments, after using his annual pension allowance.

This year, he’s looking for an exciting, high-growth investment opportunity to diversify his portfolio.

Given David’s willingness to take on the risk involved with investing in small businesses, an EIS could be a good fit to help him meet his goals.

David’s investment would allow him to claim 30% income tax relief, which he can offset against his income tax, such as the tax on his bonus. If a company in his portfolio achieves high growth, it’ll be free from capital gains tax.

Businesses in the early stages of their growth have a higher chance of failing. If this happens, David could claim loss relief against income tax or capital gains on a per-company basis at up to 45%.

This combination of tax reliefs makes for a powerful structure through which to invest in high-risk opportunities with high growth potential.

What about VCTs?

Unlike with EIS, VCTs are companies listed on the London Stock Exchange and investors hold shares in the VCT rather than directly in the underlying companies. The VCT also invests in early-stage businesses, but in an established portfolio of, say, 50-90 startups in different phases of their growth.

The typical return profile from a VCT differs from an EIS, often targeting an annual dividend of 5%, although by its nature it remains a high-risk investment.

The range of client scenarios where VCTs could be useful is broad, but let’s look at one just to highlight their potential use.

VCTs can serve as a useful planning tool for those with additional properties, such as Daniel and Helen, who are clients looking for a tax-efficient solution.

Daniel and Helen have been married for 30 years, and plan to retire in the next ten. While Daniel is a higher rate taxpayer, Helen choses to invest in property to help fund her retirement.

They want to enjoy a tax-efficient income during their retirement, but Helen is concerned about the capital gains tax she will incur if she sells her properties.

After assessing Helen’s situation, her financial adviser recommends investing £20,000 of her annual rental income in a VCT, and the remaining £10,000 in an Individual Savings Account (ISA). The VCT will target a tax-free income and complement other investments in her portfolio.

The 30% upfront income tax relief from her VCT investment (£6,000) would also eliminate the annual income tax she has to pay on her rental income.

Helen can make repeat annual VCT investments, as appropriate, to invest tax-efficiently for the future while also managing her tax bill on her rental income.

Understanding the risks

Advisers must make sure any recommendation of these products is relevant and suitable for the client in question.

The value of the investments, and any income from them, could fall as well as rise. Investors may not get back the full amount they invest.

Tax treatment depends on individual circumstances and may change in the future.

Tax relief depends on EIS portfolio companies and VCTs maintaining their qualifying status.

VCT and EIS shares are by their nature high risk, their share price may be volatile and they may be hard to sell.

Next steps

You can use our client planning scenarios to help you deliver good outcomes, and assist you in seeing how tax-efficient investments might be useful for a variety of your clients.

You can also watch a series of interviews with financial advisers covering how they use tax-efficient investments.

Explore the client planning scenarios >> 

Tax-efficient investments are not suitable for everyone. Any recommendation should be based on a holistic review of your client’s financial situation, objectives and needs. This communication does not constitute advice on investments, legal matters, taxation, or any other matters.  Issued by Octopus Investments Limited, which is authorised and regulated by the Financial Conduct Authority. Registered office: 33 Holborn, London EC1N 2HT. Registered in England and Wales No.03942880. Issued March 2024. CAM013904.


Professional Paraplanner