Bure Valley Group is an investment brokerage business which links successful investors with exciting, innovative UK startups seeking funding. This content is for information purposes only and should not be taken as financial or investment advice.
If you are interested in investing in small companies which do not necessarily trade on the London Stock Exchange, then financial advisers and investment brokers are often quick to talk about Venture Capital Trusts (VCTs), the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS). What exactly are these different schemes, how do they work and which advantages or disadvantages do they hold over one another?
Here at Bure Valley Group, we help successful investors find exciting, tax-efficient investment opportunities in companies which offer promising returns. In this short guide, we’ll be sharing some thoughts on how VCTs, EIS and SEIS work and how they might feature in your portfolio (after seeking professional financial advice).
We hope you find this content useful. If you would like to browse our latest EIS and SEIS opportunities then please visit our portfolio. Alternatively, to request an official investment memorandum regarding a specific project, please use our online form here.
An overview of EIS, SEIS & VCT
To quickly summarise, all three are UK government schemes intended to encourage investors to commit capital to startups, small businesses or key economic sectors. This is mainly achieved by offering investors attractive tax benefits. In particular:
- EIS allows an investor to commit up to £1m per tax year into EIS-qualifying companies (or up to £2m if the business is “knowledge-intensive”). 30% of your investment can then be claimed back on your tax return, against your highest rate of income tax.
- SEIS follows a similar format to EIS, except you can invest up to £100,000 per tax year in SEIS-qualifying companies and you can claim back 50% of your investment against your highest rate of income tax.
- VCTs work slightly differently. These are actually “funds” listed on the London Stock Exchange, and they invest in small unquoted businesses using investors’ pooled money. Here, you can invest up to £200,000 per tax year into VCTs and claim back 30% against your highest rate of income tax.
Key differences & similarities
You’ll notice that the EIS, SEIS and VCT schemes all share a common thread in the form of tax relief against your income tax bill. They differ, however, in the amount you can invest into each one within a given tax year. Here are some other important areas of similarity and distinction:
Dividends
Companies which qualify for EIS or SEIS may pay out dividends to investors; as might VCTs. Here, there is a key difference in that dividends from VCTs are usually tax-free, but dividends from EIS and SEIS are subject to dividend tax. It’s worth noting, however, that the small private companies under these schemes rarely pay out dividends anyway.
Capital gains
EIS, SEIS and VCT investments are highly attractive because all three allow you to grow the value of your shares and later dispose of them tax-free. The key difference here is that you do not have a hold your VCT shares for a minimum period to claim CGT relief, yet with EIS and SEIS you must retain your shares for at least three years.
Holding period
Minimum investment periods are not only relevant to CGT, however. To gain access to the income tax relief, you must also hold your VCT shares for at least five years and your EIS/SEIS shares for at least three.
Inheritance tax
VCT investments are not eligible for business property relief. This means that they will be counted as part of your estate for inheritance tax purposes. EIS and SEIS shares, however, are not included within the value of your estate if they have been held for at least two years.
VCT, EIS or SEIS – which is best?
There are other important features, advantages and disadvantages to VCTs, EIS and SEIS opportunities which we could cover. At this point, however, you might be asking which of the three is superior, and how they might feature within your investment portfolio.
At Bure Valley Group, we cannot offer financial advice for your distinct situation. However, quite often two or three of them will feature within a portfolio, with the precise blend varying depending on factors such as your investment goals and risk tolerance. A particular benefit of each scheme might appeal to you at a particular time. For instance, if you are retired and looking for ways to reduce an inheritance tax bill, then EIS and SEIS can be a compelling option as these shares can potentially be handed down to your beneficiaries, tax-free, after two years.
One important feature of EIS, SEIS and VCT investments is that they are typically classed as “higher-risk, higher reward.” It’s important, therefore, to establish with your financial adviser that these investments suit your risk profile before committing to them.
Assuming they are suitable, however, one strong advantage of EIS and SEIS to consider is their “loss relief” aspect (not available under VCT). Here, you can mitigate your losses if your EIS or SEIS investment fails. Under SEIS, for instance, you can claim at your highest rate of income tax. So if you pay the 45% additional rate and your SEIS investment fails, you can potentially claim back up to 45% of your original investment via your tax return.
Invitation
If you are a successful investor and would like to know more about the exclusive EIS and SEIS opportunities we offer here at Bure Valley Group, then we’d love to hear from you.
Get in touch today to start a conversation with a member of our friendly team, and to discuss some of the great investment memorandums we have available:
+44 160 334 0827
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