Venture Capital Trusts and Enterprise Investment Schemes can provide tax benefits to investors planning for the tax year-end.

There are various structures and products available which provide interesting investment opportunities where the downside is mitigated by tax relief. Such investments are often popular for individuals who wish to take advantage of tax planning opportunities in advance of the 5 April tax year-end.

With this in mind, we summarise the potential tax benefits of Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EISs), which are the two main types of tax efficient investments approved by HM Revenue & Customs

VCTs

  • 30% income tax relief on up to £200,000 of investment
  • Tax-free dividends and capital gains
  • Minimum holding period of five years

EISs

  • 20% income tax relief on up to £400,000 of investment
  • Unlimited capital gains tax (CGT) deferral
  • Minimum holding period of three years
  • Any capital gain realised on sale is not taxable provided income tax relief has been received and not withdrawn (a loss may be allowable for income tax purposes)
  • Relief from inheritance tax after two years

It is anticipated that the EIS will be very popular during the remainder of the tax year following the change to CGT rates announced in the Pre-Budget Report. From 6 April 2008, it is intended that indexation allowance and taper relief will be abolished and a flat rate of 18% CGT will be introduced.

This provides an opportunity for individuals to defer gains taxed at an effective rate of 40% in the last three years with an EIS investment. These gains should ultimately crystallise at the new rate of 18%, thereby providing the benefit of 22% CGT relief, in addition to the tax relief mentioned above (subject to the loss of taper relief).

Seek advice

These types of investments may not be suitable or appropriate for everyone. Typically, an investment that attracts tax relief may be considered to be higher risk, although risk mitigation strategies may feature in some products and structures. Specialist advice is therefore required. Smith & Williamson would be delighted to advise on the above mentioned tax efficient investment opportunities, their suitability for individual clients and the associated risks and benefits.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.