As seen in City AM: VCTs and EIS for the end of the tax year
Tax pressure in Britain has reached a 49-year high.
Higher earners have arguably been hit the hardest. Not only has their tax burden increased, but many of the traditional avenues to invest tax efficiently have been blocked. The tightened restrictions on pensions and crack down on buy-to-let are examples.
Where could experienced investors turn?
Both are government-backed schemes designed to incentivise private investment in young and dynamic small companies.
The reward for investors is the potential to back the next £1 billion company in the long term, whilst receiving significant tax reliefs in the short term. This potential reward is to counter the higher risks investing in smaller companies typically entails.
How much tax could you save?
With both VCTs and EIS, you could get up to 30% income tax relief.
Returns (normally paid as dividends in the case of VCTs) are tax free. Moreover, with EIS you benefit from potential inheritance tax relief and could defer capital gains from the sale of other assets.
Annual allowances are generous: £200,000 in VCTs and up to £2 million in EIS. These could be valuable to investors caught by the restrictions on pension contributions. Tax rules can change and tax benefits depend on circumstances.
Where to invest?
Below are some of our favourite offers for experienced investors: note these are not a personal recommendation to invest. You should invest after making your own considered view on the merits of the offer.
Octopus Titan VCT
This is the largest VCT. It has a great record of spotting and nurturing rising stars and achieving high-profile exits, including sales to the likes of Amazon, Google and Microsoft.
Zoopla, the first VCT-backed £1bn company, Secret Escapes, graze.com, and Tails.com all received funding from Octopus Titan VCT.
ProVen has also always specialised in growth capital deals – and generated great returns in the process. From a company that creates jewellery worn by the Duchess of Cambridge, to a leading online retailer of spectacles and contact lenses, the ProVen VCTs have a long history of backing tomorrow’s winners. Two examples that have recently come to fruition are Watchfinder, the online marketplace for pre-loved luxury watched, which was sold to Swiss luxury goods group Richemont SA and Chargemaster, the UK's largest electrical car charging firm, which was acquired by BP.
Parkwalk Opportunities EIS fund
This fund focuses on university spinouts: companies that commercialise ideas from university research. It’s a thriving sector – Cambridge University alone has spun out 15 companies valued more than $1bn – and Parkwalk is one of the most experienced investors. It works with twelve universities and manages funds in conjunction with the tech-transfer departments of Cambridge, Oxford and Bristol Universities.
Deepbridge Technology Growth EIS
This fund invests in three main sectors: energy and resource innovation, medical technologies, and high-growth IT-based technologies. To pass the test and receive funding, the companies must have intellectual property or patented products. A recent successful investment is Sky Medical which invented and produces a device, gekoTM, that helps blood circulation in the calves and is used by the NHS to reduce the risk of deep vein thrombosis.
An important caveat
Popular offers have already come and gone – the Northern VCTs, for instance, filled up in just 11 days. If you are an experienced investor and plan to invest in VCTs or EIS this tax year the sooner you act, the wider the choice might be. Leave it a couple of weeks and you might miss out.
Wealth Club aims to make it easier for experienced investors to find information on – and apply for – tax-efficient investments. You should base your investment decision on the provider's documents and ensure you have read and fully understand them before investing. This review is a marketing communication. It is not advice or a personal or research recommendation to buy the investment mentioned. It does not satisfy legal requirements promoting investment research independence and is thus not subject to prohibitions on dealing ahead of its dissemination.
Do you want to get back tax you've already paid?
This might be possible when you invest in EIS and your shares are allotted this tax year.See EIS offers aiming to allot shares this tax year