With tax rises on the horizon, Alex Davies, CEO of Wealth Club, outlines why the launch of the new Octopus Ventures EIS is a silver bullet for investors:
“The launch of the new EIS from Octopus is welcome and timely – both for investors and the industry. Speculation around tax rises is rife, and the Octopus EIS provides a golden opportunity for investors to not only access some of the best up and coming companies at an early stage, but crucially benefit from the tax relief that EIS offer.
“Octopus is by far the most mainstream company in the rather niche world of tax-efficient investments. Its re-entry into EIS should help bring EIS further into the mainstream. With a big brand name and a good track record in spotting tomorrow’s winners we expect this EIS to be very popular. It could appeal to those already investing in EIS as well as a new audience who see Octopus’s involvement as a reason to ‘graduate’ from VCTs to EIS. The charging structure is also attractive: after the initial charge, you only pay as and when a company succeeds.
“Through the Titan VCT, the team behind it – Octopus Ventures – has already backed a string of the UK’s fastest growing private technology companies from Zoopla to Cazoo. They’re now applying to EIS the same tried and tested formula.
“Of course, there are risks and – with a much more concentrated portfolio – they’re higher than with Octopus Titan VCT. That said because you are only investing in 10 to 15 companies, if things go well you have the chance of getting much higher returns than you would from the VCT. EIS tax relief is also far more generous than that afforded to VCTs.”
How does the tax relief work on EIS?
EIS offer up to 30% income tax relief and there is no capital gains tax to pay on any gains. They also offer inheritance tax relief after two years. You can also defer chargeable capital gains you’ve realised from the sale of other investments including properties. For as long as you stay invested in any EIS, you can forget about the CGT bill. It will only become payable once you come out of the EIS, unless you re-invest the money into another. The allowance is £1 million a year or £2 million if you invest at least £1 million into “knowledge intensive” companies.
How do VCT tax benefits compare with EIS?
|Maximum Investment||Income Tax Relief||GGT Relief/Deferral||Tax-free dividends||Tax-free growth||IHT relief||Loss relief|
|VCT||£200,000||up to 30%||No||Yes||Yes||No||No|
|EIS||£2,000,000||up to 30%||Deferral||No||Yes||Yes (after two years)||Yes|
What is causing the demand in EIS?
Wealth Club has seen record demand for EIS and SEIS opportunities this tax year, with sales up 55% since April compared with the same period last year.
VCTs and EIS have different structures and tax reliefs. So ultimately which you choose will depend on your tax position, whether its income or growth that is important to you, and your attitude to risk.
When investing in Octopus Titan VCT, an investor gets exposure to the whole portfolio (currently around 80 companies) – a combination of older and new investments. The investor buys shares in the VCT, which invests in the portfolio companies. The VCT is expected to generate some of its returns via tax-free dividends, not guaranteed.
When investing in the Octopus Ventures EIS Service, an investor gets exposure to a much smaller (10-15) number of companies, which will receive investment after the tranche closes. The investor buys shares in the portfolio companies directly. Portfolios are likely to be different, depending on the tranche.
This means the EIS portfolio is much more concentrated: any individual failures, as well as any individual successes, will have a greater impact on the portfolio than they do within the VCT. EIS returns also tend to come in the form of exit only. Put another way, with the EIS there is more risk of losing money, but the potential rewards could be greater and the available tax relief more generous: tax benefits can change and benefits depend on circumstances.