VCTs and Enterprise Investment Schemes

VCT and Enterprise Investment Scheme

EIS (enterprise initiative schemes), VCT (venture capital trust) and CVS (corporate venturing schemes) have been with us now for over 15 years primarily as a high risk investments with tax advantages.

The market has taken to exploiting these tax advantages within the advisory process, but as with anything that has tax advantages, there also comes complexity.

It is key to the advisory process, that not only are the planning implications of these investments considered, but also the technical understanding to ensure appropriateness.

There are three main types of VCT generalist, aim and specialist and they all have different risk profiles.

Generalist

General VCTs spread investments between aim listed companies and unlisted companies giving greater choice of investments for the managers. They often have a policy of investing in companies that are already or very nearly profitable. They can generally access larger commercial enterprises via the management buy in/out route. In addition they are often able to secure a seat on the board and offer guidance and advice to a developing enterprise.

Aim

Aim VCTs invest in companies that are quoted on the alternative investment market (aim) index. Aim is an exchange on which smaller companies are quoted. VCTs investing in aim shares are likely to show higher returns as they tend to be fully invested more quickly. As a result they may miss out on some highly profitable situations that may be available with unquoted shares but may also avoid some total losses. Historically, overall, aim VCTs have performed better than asset backed or generalist VCTs.

Specialist

Specialist VCTs tend to invest in only one area such as healthcare, technology etc. This makes them the most risky of all of the types of VCT.

Some trusts invest in a combination of all three areas.

Investing through an EIS fund

A number of investment managers provide collective schemes which enable investors to benefit from the full range of EIS reliefs spread across a number of investments. The types of funds fall into the following categories:

  • Approved investment funds
  • Unapproved funds
  • EIS portfolios

Approved funds

The key difference between approved and unapproved funds is that the former allows EIS income tax relief to be claimed from the date of investment in the fund, whereas for the latter, the claim can only be made when the actual underlying investment is made. This can make a significant difference to the timing of income tax reliefs dependent on personal circumstance. Approved investment funds do however have very strict rules.

Approved investment fund status

To obtain approved EIS fund status, the fund must be approved by HMRC. The main benefit is that for the purpose of determining the “tax year” for which income tax relief can be obtained, all EIS shares acquired through the fund are treated as it they had been issued on the date when the fund closes (provided that 90% of the fund’s monies are invested within twelve months). For EIS deferral relief and all other tax purposes, investing through an approved fund has no effect and the subscription for qualifying shares will still occur at the time it is actually made in the qualifying company via the fund.

The main conditions for approval are:

  • Subscription must be made by the fund for shares in at least four companies and allocated between investors in proportion to the amounts they have contributed
  • No investments may be made by the fund until it closes (the fund closes on the latest date on which applications in it can be accepted)
  • It must be expected that the conditions of the enterprise investment scheme which apply in relation to shares and companies will be satisfied for all the investments made by the fund
  • The approval of the fund by HMRC is relevant only for the purpose of attracting certain tax advantages under s.251 income tax act 2007. Such approval concerns only certain administrative matters and the timing of income tax relief. It in no way bears on the commercial viability of the investments to be made; neither does it guarantee the availability, amount or timing of relief from income tax or capital gains tax.

Unapproved funds

An unapproved EIS fund is more flexible than an EIS fund approved by HMRC as there are no restrictions on the number of investments or the timing of the investments. The minimum investment by each investor in each EIS qualifying company is £500 if EIS relief is to be obtained.

It must be expected that the conditions of the enterprise investment scheme which apply in relation shares and companies will be satisfied for all the investments made by the fund.

These allow the investment manager to make investments without a time limit. The effect of this is that an investor will obtain EIS relief on a per EIS investment basis in the year in which shares are issued to the fund by each EIS qualifying company pursuant to the investment made in that EIS qualifying company.

EIS portfolios

These are generally operated by private client fund managers as part of wealth management activities and are generally made according to a bespoke investment and risk profile. Tax reliefs are granted on investment in the underlying companies.

The value of investments (including property) and the income derived from them may go down as well as up and is not guaranteed. You may not get back the amount originally invested.

Levels and bases of and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor.

Please note these are high risk investments and can deal in AIM listed companies which can result in lower liquidity. This may restrict when you can withdraw money and you may get back less than you invested.