Investing in EIS and VCTs together
As a result of the differences between EIS and VCTs, that have been laid out in this document, many advisers recommend that clients invest in both products, at the same time. The benefits of adopting this approach are:
- Potential of regular income streams over a number for years.
- Diversification across the companies that sit within the VCT fund and EIS portfolios.
- Increased exposure to Venture Capital (early-stage businesses) which may provide diversification against existing traditional portfolios, such as listed stocks and bonds. For more information on how Venture Capital provides diversification, see an independent report written by Hardman & Co which argues that Venture Capital is its own asset class.
- Access to a multitude of complementary tax reliefs.
- Retaining access to growth with EIS investment, whilst benefiting from the potentially shorter time horizon in a VCT.
‘The Complimentary Duo’ – A Fictional Case Study
To help demonstrate how this would work, we would like to introduce you to Manesh, who is an additional rate taxpayer and has recently made a large gain on the sale of a property. He wants to eradicate his entire Income Tax bill in the current and previous tax year. So, he invests into both a VCT and EIS today allowing him to claim 30% upfront Income Tax relief through his VCT against the current year’s income tax bill and his EIS investment, which he can carry back to offset Income Tax against the previous year’s income tax bill. Through his EIS, he defers his CGT bill from the sale of his property, allowing him to delay paying the bill until the companies on his EIS portfolio exit (reducing the bill with potential growth on investment).
Please note: VCT investors need to be comfortable with the risk profile associated with this type of investment.
Planning scenario explained:
- For the first 5 years of the investment, Manesh receives regular tax free dividends from his VCT investment which he uses as an additional income stream.
- On year 5, he sells his VCT portfolio at a 95% reduction of NAV. At this point, he may choose to reinvest the money into another VCT to restart the cycle of dividends and claim 30% upfront tax relief again.
- From year 5-10, the companies in Manesh’s EIS portfolio start to sell, allowing him to potentially receive tax free growth on his original investment amount. He may be entitled to use his annual capital gains allowance to reduce the overall CGT bill owed.
- For any companies in the EIS portfolio which have been sold at a loss, Manesh may be able to claim loss relief to reduce his overall capital exposure. If he does not wish to pay the CGT bill back at all, he may reinvest in another EIS portfolio to keep deferring this.
- If Manesh holds his EIS investment for two years, then at the point of death, it is free from IHT.
- Should he pass away whilst holding the investment, the CGT bill is also no longer payable.
Why not subscribe to watch the Educational Videos?
To accompany the online learning material we have also included a series of 4 videos to help explain EIS. Each video is 45 minutes long. To access video content you will need to register. Based on attendee feedback, this series is classed as a world leading event according to Net Promoter Scores.
EIS: The Basics – On Demand
Our industry leading educational programme covers the basics on what you need to know to recommend an EIS.
If you’ve never recommended an EIS before, we suggest you start with episode 1.
Click the image below to sign up and access the video instantly, free of charge.
EPISODE 1
The Modern World of EIS
An exploration into why EIS is more popular than ever, how early-stage companies are performing in the modern day climate and covering the basics of the tax reliefs.
45 mins
EPISODE 2
Trigger Points
Investigating the types of clients where EIS is most suitable.
45 mins
EPISODE 3
Due Diligence & Research
Understanding the due diligence required by advisers who are recommending EIS to clients.
45 mins
EIS: Advanced – On Demand
This is recommended for advisers who have completed the EIS—The Basics course, who already recommend EIS, or who are confident in tax-efficient investments.
Click the image below to sign up and access the video instantly, free of charge.
EPISODE 1
Journey of an Investee Company
Investigating the journey of companies as they grow to the point of exit, and understanding how returns are achieved through an EIS investment.
45 mins
EPISODE 2
More than just a tax tool
By analysing findings established in the Hardman & Co report, we discuss how you can add Venture Capital to a clients portfolio without impacting overall risk levels.
45 minutes
EPISODE 3
Financial Planning Considerations
Understanding the due diligence associated with recommending an EIS, and a closer look at tax planning scenarios.
45 minutes
IMPORTANT: The views expressed in these webinars are the views of the individual and not necessarily of Deepbridge Capital LLP. Figures quoted by the presenter and/or guest may be approximations. The content of these videos should not be construed as financial advice. This video is a real-time financial promotion and, as a result, has not been approved as a financial promotion for the purposes of Section 21 of the Financial Services and Markets Act 2000.
RISK WARNING: Any decision to invest should be made only on the basis of the relevant documentation for the investment available in the accompanying company profile. Investments in unquoted companies carry high risks. Capital invested will be at risk and you could lose all of your investment. No established market exists for the trading of shares in private companies, making it difficult to sell shares.
Tax treatment depends on the individual circumstances of each investor and may be subject to change in future. The availability of tax reliefs depends on the Company invested in maintaining its qualifying status. Past performance is not a reliable indicator of future performance.
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