Venture Capital Trust (VCT), Enterprise Investment Scheme (EIS), Alternative Investment Market (AIM)
Venture Capital Trust (VCT)
A VCT is a tax efficient UK closed-end collective investment scheme designed to provide venture capital for small expanding companies, and income (in the form of dividend distributions) and/or capital gains for investors. VCTs are a form of publicly traded private equity, comparable to Investment Trusts. VCTs tend to have a minority stake in the businesses they invest in, as opposed to private equity investing where a majority stakeholder position is held.
VCTs are companies listed on the London Stock Exchange, which invest in other companies which are not themselves listed. First introduced by the Government in the Finance Act 1995 to encourage investment into new UK businesses, they have proved to be much less risky than originally anticipated.
The types of VCT available are Generalist, AIM or Specialist. The tax benefits are:
- Exemption from income tax on dividends on ordinary shares in VCTs
- Exemption from capital gains tax on disposal of shares in VCTs
- Income tax relief at the rate of 30% on the amount subscribed for the shares (up to £200,000 in a tax year, if they are held for at least 5 years)
Enterprise Investment Scheme (EIS)
An EIS is designed to encourage investments in small unquoted companies carrying on a qualifying trade in the UK.
Investment in companies that are not listed on a stock exchange often carries a high risk of loss of capital, and low market liquidity means that it may be difficult or time consuming to sell or realise the investment. The tax reliefs available under an EIS are intended to offer investors some incentive to counterweigh those risks, as follows:
- 30% upfront Income Tax relief, which can be carried back to the previous tax year. The maximum subscription is currently £1,000,000 per investor per year, yielding a potential reduction in tax liability of £300,000 per annum (assuming the investor has sufficient income tax liability)
- Capital Gains Tax deferral – an investor can defer capital gains realised on a different asset, where disposal of that asset was less than 12 months before the EIS investment or less than 36 months after it. This relief is limited to the amount being invested into the EIS and can be claimed by investors whose interest in the company does not exceed 30%
- No Capital Gains Tax to pay on any gains made when the investment is realised after three years, provided the EIS initial income tax relief was given and not withdrawn on those shares
- Tax relief from investment losses – if EIS shares are disposed of at any time at a loss, such loss can be set against the investor's capital gains or income in the year of disposal
- Shares do not form part of the estate for Inheritance Tax purposes, provided the investments have been held for at least 2 years at time of death and the company qualifies for Business Property Relief
Alternative Investment Market (AIM)
An AIM investment is primarily designed as an Inheritance Tax efficient investment by investing in companies not listed on a main stock exchange that qualify for Business Tax Relief. This means that the investment should become free from Inheritance Tax after two years, provided the investment is still held at the time of death. They can then be passed on as part of your estate to beneficiaries named by you.
Your money is placed in a discretionary portfolio managed by a specialist provider who will buy shares on your behalf in companies they select. AIM and VCT ISAs are also available and enjoy the same tax advantages.