VCTs, EIS and SEIS - what are the differences?
Venture Capital Trusts (VCTs) and the Enterprise and Seed Enterprise Investment Schemes (EIS and SEIS) are government-backed schemes set up to encourage investment in young businesses crucial to the UK economy. They have similarities – including tax reliefs for experienced investors – but also key differences. How do they compare, and who might consider them?
The available tax reliefs — at a glance
|Income tax relief||Up to 30%||Up to 30%||Up to 50%|
|Tax free dividends||Yes||No||No|
|Tax free growth||Yes||Yes||Yes|
|Capital gains relief||No||Deferral||50% relief|
|IHT relief available||No||Yes||Yes|
To retain the tax relief you must hold the investment for at least five years (VCT) or three years (EIS and SEIS) and it must remain qualifying.
Only new shares qualify for income tax relief. This is very a simplified explanation of a complex subject. Remember, tax benefits depend on circumstances and tax rules can change.
What do VCT, EIS and SEIS funds invest in?
VCTs, EIS and SEIS typically invest in much smaller and younger companies than traditional ISAs and pensions. They invest in private or AIM-quoted companies (rather than companies listed on the main London Stock Exchange). As small companies are more likely to fail and AIM-stocks can be more volatile than their larger counterparts, generous tax reliefs are offered in view of the commensurate higher risk.
Some of these companies may fail, some may do moderately well. But for those happy with the risks there is also potential that some may join the UK’s growing list of unicorns – startups that have achieved $1 billion valuation. According to the Department for Digital, Culture, Media & Sport, 29 UK companies became unicorns in 2021, the largest concentration of new unicorns to date. You may recognise some VCT and EIS-backed unicorns, such as pet insurer Bought By Many (now called ManyPets), meal ingredients subscription Gousto, microchip developer Graphcore and property platform Zoopla.
Remember, these are high risk investments for experienced investors and you should not invest money you cannot afford to lose.
VCTs are themselves companies listed on the London Stock Exchange. They are akin to investment trusts and typically invest in 30-70 young, small and dynamic private or AIM-quoted companies. Zoopla was backed by the Octopus Titan VCT in its early stages and subsequently became the first VCT-backed company to achieve unicorn status.
When you invest, you acquire shares in the trust, not in the individual companies – so you get exposure to the entire portfolio, usually across a range of sectors and stages of maturity.
The maximum you can invest tax-efficiently into VCTs is £200,000 per tax year.
EIS funds focus on the same type of companies as VCTs – but usually with less diversification and sometimes earlier-stage. For example, Gousto was backed by MMC Ventures EIS Fund in 2013, shortly after it was founded in 2012.
Unlike a VCT, when you invest in an EIS fund, you'll become a direct shareholder in 5-10 individual companies – these will have been selected by the fund manager according to the fund’s investment strategy. This concentration of investment, directly into a few companies, makes EIS riskier than VCTs. To reflect the higher risk, the tax reliefs are more generous.
The maximum you can invest tax-efficiently into qualifying EIS companies is £1 million per tax year, or up to £2 million provided anything over £1 million is invested in “knowledge-intensive” companies.
SEIS funds focus on even smaller, younger – and therefore riskier – companies than EIS and VCTs. Cognism was backed by the Startup Funding Club SEIS Fund in 2017 when recurring revenues were just £4,500; in 2020, it announced annual recurring revenues were over $11 million.
When you invest, you'll become a direct shareholder of around 10 (sometimes up to 25) individual companies, selected according to the fund’s investment strategy. To reflect the additional risks, SEIS offers the most generous tax reliefs of the three schemes.
The maximum you can invest tax-efficiently into qualifying SEIS companies is £100,000 per tax year.
Who might consider investing in VCT, EIS and SEIS funds?
If you’ve used up your ISA and pension contributions allowances, you may be looking towards other tax-efficient ways to invest your money – particularly if you have high income or capital gains. This includes if you’ve recently sold a business or buy-to-let portfolio, or received a large lump sum on retirement or redundancy.
Experienced investors comfortable with investment risk may consider attractive the tax breaks offered by VCTs, EIS and SEIS. These government-backed Venture Capital Schemes were set up to encourage investment in the innovative, job-creating young businesses crucial to the UK economy.
What are the main risks?
You may get back less than you invest or even lose all your capital. Because these investments are in small, often private, companies, the risk of losing money can be much greater with VCTs, EIS and SEIS than with other stock market investments. VCT, EIS and SEIS investments are also less liquid; they can be harder to sell even though VCTs are listed on the London Stock Exchange. To retain all the tax reliefs available, you must hold the investment for a minimum period and the companies must remain qualifying – otherwise, you may have to pay back the tax relief you have received.
These are long-term investments only for experienced investors who have no need for immediate liquidity and are able to withstand a potential total loss. You should make sure you are fully familiar with the risks and rules if considering investing, and do so on the merits of the investment, not for the tax advantages alone. See more on the Risks and Commitments here.
Free guide: VCT, EIS and SEIS tax reliefs compared
For more information please read our simple guide – it gives an overview of the differences between VCTs, EIS and SEIS and how the tax reliefs compare.
If you have any questions on the guide or another investment matter, please get in touch.
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Wealth Club aims to make it easier for experienced investors to find information on – and apply for – investments. You should base your investment decision on the offer documents and ensure you have read and fully understand them before investing. The information on this webpage is a marketing communication. It is not advice or a personal or research recommendation to buy any of the investments mentioned, nor does it include any opinion as to the present or future value or price of these investments. It does not satisfy legal requirements promoting investment research independence and is thus not subject to prohibitions on dealing ahead of its dissemination.