4 February 2014

Tax-Efficient Investing - VCTs and EISs

Apart from investment performance and charges, the other main factor when considering how to invest some hard-earned money is tax. Obvious starting points are the annual ISA allowance, and the tax relief you receive on pension contributions. But both of these have their limits.

For larger sums (and for other reasons), Venture Capital Trusts (VCT) or the Enterprise Investment Scheme (EIS) may be appropriate. Although often considered together, and both created by the government to encourage investment in small companies, they are actually rather different beasts. But without going into too much detail here's some highlights.

Both provide Income Tax relief of 30% - that means getting back Income Tax you have paid up to 30% of the value of your investment. Regardless of investment performance this is often a reason for VCT or EIS investment on its own. You do have to hold the investment for a while, though - 3 years for EIS, 5 years for VCT. The latter also provides tax-free dividend payments.

With an EIS investment there is also potential to defer Capital Gains Tax - business owners selling a company can take advantage here. And your Inheritance Tax situation may also be improved with an EIS investment after two years using "Business Property Relief".

All in all, these types of product are worth considering, particularly if you have a tax issue which can be addressed. However, ultimately you have to remember that you are investing in small companies which are inherently less stable than larger ones. Professional advice is certainly recommended.

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