Tax incentives aimed at helping enterprise
Question: What’s the difference between the Government’s Enterprise Investment Scheme and Venture Capital Trusts in relation to maximising my tax incentive breaks?
Stephen Hill, senior partner of S Hill and Co Investment Advisors, replies:
Both of these tax relief schemes have been in existence for years, and were introduced by the Government to sit alongside pension relief for business people, high earners, or high net-worth individuals.
By offering attractive tax incentives with the promise of return on investment over a set period, they are used to attract investment from individuals to developing British enterprises that require capital.
They are both very useful tax relief schemes that high-earners can use to maximum effect, depending on their current and future earnings and when they are planning their own lifestyle and retirement.
In essence, the differences boil down to the investor’s own attitude to risk, how much money they earn, how much money they would like to invest, and at what stage they are with regard to their working life.
One of the main differences between VCTs and EISs is that EIS give up to 18% Capital Gains deferral (CGT) and are the only available tax incentive scheme to do so. However, VCTs generally attract 30% income tax relief, give tax free dividends and a tax free exit, have an investment limit of £200,000, and have a minimum holding period of five years to qualify for the tax relief.
EISs attract 20% income tax relief, a capital gains deferral rate of up to 18%, no tax free dividends but a tax free exit, come with no impact on Inheritance Tax, have a investment limit of £500,000, and a minimum holding period of three years to qualify for the tax relief.
Both can be highly beneficial to the investor, but I would seek independent financial advice to assess your current investment needs before opening one up.