If you are considering investing in a tax-advantaged scheme, either an enterprise investment scheme (EIS) or a venture capital trust (VCT), there are some important differences in the tax breaks for each scheme. It’s worth remembering that where there’s a tax break, there’s often risk, so IFA advice is always recommended.
Income tax relief
Income tax relief equal to 30% of the amount invested is obtained under each scheme and reduces your income tax bill accordingly. The tax relief is given as a reduction of your tax bill.
For example, if you invest £20,000 in an EIS or VCT your tax bill is reduced by £6,000 (£20,000 x 30%)
The main differences in EIS and VCT income tax relief are:
- Investment limit of £1m applies to EIS (£2m if knowledge intensive company) and £200k to VCTs
- EIS tax relief can be carried back from the year of investment to the previous year to accelerate the tax saving
- The income tax relief is clawed back if you sell or transfer an EIS investment (unless it’s to your spouse or civil partner) within three years. For VCTs, the claw-back period is five years
- Income from VCTs are tax exempt but income from EIS investments remain taxable
Capital gains tax relief
Capital gains on any EIS or VCT investment are exempt from capital gains tax. Under EIS, the investment must be held for at least three years, but no such restriction applies to VCTs. If you make a loss on an EIS investment you can offset this against other gains in the same or future years. No such relief is available for VCTs.
Capital gains tax deferral
EIS investment can allow a capital gain in the current or preceding year to be deferred. Deferral of the capital gain is possible until you sell or transfer the investment (to someone other than your spouse or civil partner).
For example, if you made a taxable capital gain in 2020/21, you could defer when it’s taxed by investing in an EIS company on or before 5 April 2022. Additionally, by using the carry-back rule mentioned earlier, income tax relief could be claimed for 2020/21.
At a glance summary:
- 30% rate of income tax relief is the same for EIS and VCT
- Investment of up to £2m possible under certain EIS
- EIS relief can be used to reduce your income tax bill for the year of investment or the previous year
- EIS investments allow you to indefinitely defer capital gains tax liabilities
- VCT income and capital gains are tax exempt whereas income from EIS investments is taxable
Generally, EIS investments tend to be riskier than VCTs but successful EIS investments can produce greater income or gains. However, there’s no certainty of success and IFA guidance is recommended. There are also other tax advantaged schemes not covered in this article (Seed Enterprise Investment Scheme and Social Investment Tax Relief).