EIS vs VCT

A comprehensive guide explaining the differences between a Enterprise Investment Scheme & Venture Capital Trusts.

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The differences

Exits and liquidity

EIS

Exits in an EIS are made on a company-by-company basis, as investors own shares in each business that form together the EIS fund.

Exit strategies for EIS companies are similar to those of a private company, typically by trade sale of shares, management buy-out, listing on a recognised exchange or liquidation. HMRC set out in the Income Tax Act that no pre-arranged exits are permitted in an EIS, and shares must be held for a minimum of three years before the exit point (for tax reliefs to apply).*

Although an exit is not the primary driver in raising EIS investment, fund managers typically value companies on an exit assumption (whether applied to EBITDA on 5 year projections or another method). As and when exits occur, the value of the shares (including the original investment amount and potential growth) can be paid out directly into an investor’s bank account as a lump sum.

Over the lifetime of a portfolio, this may be considered as an additional, tax free income source. Although investors have the potential of direct exposure to tax free growth, the process and timescales of an exit may be complex and lengthy.

*Income Tax Act 2007 (legislation.gov.uk)

VCT

VCT investors’ shares may be sold after the 5 year minimum term is completed, although VCTs may only permit the sale of holdings at certain times in the year.

At this point, investors may wish to reinvest into another VCT, but are not permitted to buy and sell shares within the same VCT, within a 6 month period.*

At the point of sale, it is common for shares to be sold at a discounted valuation of their Net Asset Value (“NAV”). The NAV represents the total value of the VCTs assets minus its liabilities. Assets are the value of its investments, along with cash and receivables, and any liabilities such as management fees and expenses will also be subtracted from the NAV. Therefore, published returns may not always be what the investor sees on exit.

Exits are either achieved by share buybacks from the fund manager themselves (typically at a discount as above) or via secondary trading. Trading of VCTs is permitted, but it may not always be easy to sell these holdings. This can be because shares traded on a secondary market may have lower liquidity compared to more widely traded securities and it may be hard to find buyers, especially if there is low demand. Discounts are also a factor in secondary trading and will be higher if demand is low.

*CG13350 – Bed and breakfasting: general – HMRC internal manual – GOV.UK (www.gov.uk)

Consider this

Some fund managers may use both their VCT and EIS structures to fund the same portfolio companies, so a consideration of portfolio diversification is potentially important. This may be increased if different fund managers are used, as many fund managers offering both VCT and EIS will use both funding sources for the same investee companies.

EIS | EIS Guide

A Guide to the Enterprise Investment Scheme & Seed Enterprise Investment Scheme.

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.

1. EIS Basis Modern World of EIS
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

2. EIS Basics Trigger Points
EPISODE 2

Trigger Points

Investigating the types of clients where EIS is most suitable.

 45 mins

3. EIS Basics Due Diligence Research_01
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.

Academy Advanced Episode 1
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

Academy Advanced Episode 2
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

Academy Advanced Episode 3
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.

CLICK HERE TO ACCESS FURTHER ON-DEMAND LEARNING CONTENT FROM DEEPBRIDGE

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