EIS and VCTs: High risk investments with attractive tax reliefs

For experienced investors seeking to combine growth potential with tax efficiency, Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCTs) stand out as two of the most generous government investment incentives available in the UK.

While they come with higher levels of risk, they also offer a suite of powerful tax benefits designed to reward those willing to support early-stage, innovative British businesses.

If you’re a high-income earner, approaching retirement with surplus capital, or looking for inheritance tax (IHT) solutions beyond traditional planning routes, EIS and VCTs can add a valuable layer of strategic depth to your portfolio.

Why consider EIS or VCTs?

Both schemes are designed to channel private investment into small and growing UK companies that may struggle to access traditional funding. In return for the additional risk investors take on, the government offers generous tax reliefs, effectively softening the downside and amplifying potential rewards.

However, these are not investments for the faint-hearted. They suit individuals with an appetite for risk, a long-term horizon, and the capacity to weather potential losses. That said, when used appropriately within a broader diversified strategy, they can significantly enhance tax efficiency and capital growth.

Key benefits of EIS and VCTs

1. Income tax relief

This is often the most immediate and attractive benefit:

• EIS: Offers up to 30% income tax relief on investments up to £1 million per tax year (or £2 million if at least £1 million is invested in knowledge-intensive companies). So a £100,000 investment could reduce your income tax bill by £30,000.

• VCTs: Offer 30% income tax relief on investments up to £200,000 per year, provided you hold the shares for at least five years.

This relief is particularly valuable for high earners and those with significant tax liabilities, turning EIS and VCTs into effective tools for income tax planning.

2. Capital gains tax (CGT) advantages

• EIS: Provides the ability to defer CGT on gains from the sale of other assets if those gains are reinvested in EIS shares. The tax becomes payable only when the EIS shares are sold or the deferral conditions are broken. Gains made on EIS shares are also completely CGT-free, provided they have been held for at least three years.

• VCTs: Gains made on VCT shares themselves are completely CGT-free, provided the shares have been held for at least five years.

This makes both options particularly useful for individuals with taxable gains from property, shares, or business disposals.

3. Loss relief (EIS Only)

EIS offers an additional layer of downside protection: loss relief. If your EIS investment performs poorly and is ultimately sold at a loss, you can offset the loss (after accounting for income tax relief) against your income or capital gains.

For example, if you invest £100,000 in EIS and receive £30,000 in tax relief, your net at-risk capital is £70,000. If the investment becomes worthless, you could claim loss relief on that £70,000, potentially recovering up to 45% if claimed against income, depending on your tax rate.

This makes the real cost of a loss lower than it initially appears and is a critical feature for risk-conscious investors.

4. Inheritance tax relief (EIS Only)

EIS shares may qualify for 100% Business Relief, provided they are held for at least two years and at the time of death. This removes the investment from your taxable estate, offering a powerful IHT mitigation strategy.

Unlike many IHT solutions that require gifts or trusts often involving complex decisions and the loss of access to capital. EIS allows you to maintain ownership and control, with the added benefit of tax relief.

Important considerations and risks

While the tax incentives are appealing, EIS and VCTs are not suitable for all investors. It’s essential to consider the risks:

• Illiquidity: These investments are not easily traded. EIS shares, in particular, are typically held in unlisted companies, which may take years to mature or fail entirely.

• Risk of capital loss: Small and early-stage companies can be volatile, and there is a genuine risk of losing some or all of your investment.

• Holding periods: To retain tax benefits, shares must be held for a minimum period, three years for EIS and five years for VCTs. Selling earlier may result in tax reliefs being clawed back.

• Complexity and due diligence: Choosing the right EIS or VCT provider is critical. Quality varies significantly, and due diligence is essential to ensure investments are professionally managed, well-diversified, and focused on viable business models.

You should also be aware of the administrative requirements associated with EIS claims, including the completion of HMRC forms and potential delays in securing relief if documents are not processed promptly.

A valuable tool in the right hands

When aligned with your broader financial goals, EIS and VCTs can provide diversification, growth potential, and valuable tax advantages. They’re not for everyone, but for experienced investors with a high net worth and suitable risk appetite, they offer opportunities that few other investments can match.

Curious about how these strategies could fit into your financial plan? Book a complementary call today for personalised, expert advice.