WHY PAY TAX – EIS AND VCT (ENTERPRISE INVESTMENT SCHEME AND VENTURE CAPITAL TRUSTS) 01.11.13
Both of these invest in unquoted companies so there is some investment risk not just in terms of share prices going down but also whether there is a market to sell at all. So it is important to look at the exit route. VCT’s tend to be quoted on AIM, the Alternative Investment Market. Often they are start up companies or small companies wanting to use extra capital to expand.
So to encourage investors the government offers you a 30% tax break. This is given by a reduction in your tax liability at 30% of the amount you invested. However it is only a reduction in the tax that would have been paid anyway.
These products are aimed at High Net Worth Individual, HNWIs or sophisticated investors. However, we know of some EIS’s where the volatility range is historically more restricted.
There is a product that has been around for a while and has given a return after three years of between 90% and 110% of the original investment. That’s not good you say! However when you factor in the 30% from HMRC the returns then look very good. Say you invested £100,000 . HMRC refund to you £30,000. So the investment has cost you £70,000. If you get back the lower end of the range, £90.000 you have just made £20,000. That is a return over over 12% p. a. However, as with all these things past performance is not necessarily a guide to the future and you may get back less than that.
There are various companies that provide different ways of creating a portfolio of EIS and VCT investments as a way of mitigating the risk.