However, should the structure, and administrative ease of VCT trump the multitude of additional benefits offered by EIS? If tax-free income isn’t required, is a VCT really the best recommendation?
Going back to the table, above, advisers and investors may be missing a trick by not looking more closely at EIS for those who aren’t looking for a tax-free income. Sure, an EIS will require the investor to collect multiple EIS3 certificates, and it may take longer to accrue those EIS3 certificates, but do the additional benefits outweigh the additional admin “faff”?
Lets focus on the core differences:
Capital gains tax deferral relief
Unlike VCTs, EIS provides investors with the ability to defer a capital gain, by investing the profit generated from another asset in to an EIS, which will defer the necessity to pay the CGT bill all while the gain amount is held within their EIS. Many advisers I speak to have clients sitting on share or property portfolios with big capital gains, and using an EIS to help crystallise those gains, but avoid them having to pay a hefty CGT bill is a great financial planning option. As any adviser will know, CGT is the only tax liability that dies with you, and if you can also help them reduce their IHT liability at the same time, this will be a real benefit.
Inheritance tax relief, via business relief
Unlike VCTs, the underlying shares in EIS qualify for Business Relief (BR). This means that, subject to a 2-year minimum holding period, and the shares still being held at point of death, those shares will fall outside of the investor’s estate for IHT purposes. This can be of huge benefit when conducting estate planning with clients, as by making use of CGT deferral relief and Inheritance tax relief, an EIS moves from simply being a high risk investment with some attractive income tax reliefs, to a holistic tax planning tool. Providing the investor has a suitable attitude for risk, capacity for loss, and does not require short-term liquidity.
Loss relief
Unlike VCTs, EIS provides a safety net. The UK Government is effectively underwriting a significant proportion of the downside risk by giving every investor the opportunity to apply for loss relief for those occasions where a company struggles or fails.
If the share value drops to zero (i.e. the company fails), or the shares are sold for less than the original amount invested, then an investor can claim loss relief, which will enable them to offset a loss made on an EIS company against either their CGT bill or income tax bill, depending on which best suits their situation. The amount of loss relief provided depends on their income tax rate, so if they are an additional rate taxpayer, the maximum loss they could incur by investing in to EIS is 38.5% of their capital.
Loss relief is based on each company in a portfolio, not on the portfolio overall. So, even if your EIS portfolio is showing a 3x return, if there are one of two failed companies in there, it is perfectly acceptable to claim loss relief on these.
To summarise, the choice should be quite simple – if a client wants income tax relief and a tax-free income, then VCTs are certainly the way to go. However, if they are looking for tax-free capital growth, for a vehicle to help them defer CGT, or even if they like the idea of investing in to early-stage companies, but want the comfort of a downside safety net, then an EIS is a consideration. Advisers and clients alike need to ask themselves, “do the additional benefits offered by an EIS outweigh the simplified administrative burden of a VCT?” If the answer is yes, then this blog has served its purpose.
Mark Bower-Easton, Business Development Manager, Oxford Capital
Mark is Business Development Manager at Oxford Capital. He is responsible for building and maintaining
relationships with private clients, intermediaries, family offices and institutions, for the ongoing raising of funds for Oxford Capital’s investment strategies. Mark has extensive experience in financial services, qualifying as a financial advisor in 2004, and as a stockbroker in 2006. Prior to joining Oxford Capital, Mark was a Partner in a FTSE 100 wealth management business for nine years, dealing with HNW and VHNW clients, and was very active in the tax-advantaged investments marketplace.
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