Tax advantages of VCTs and EISs
• Income tax relief at the rate of 30 per cent on the amount subscribed, available on investments of up to £200,000 per tax year for VCT and £1m per tax year for EIS.
• Exemption from income tax on dividends paid by the VCT, not available on EIS.
• Exemption from CGT on disposal of the shares for both schemes.
• Additional advantages of EIS schemes include loss relief carry forward. What is more, an investment can use the previous year’s income tax situation as well as the current year's.
• An EIS can also be used to defer paying capital gains made on any other type of asset. If the capital gains made in any other asset are invested into a company using an EIS, the capital gains tax owed can be deferred until the sale of the shares invested in.
• EIS schemes qualify for business property relief after they have been held for two years and so are not included in the investor's estate on death.
How is tax relief claimed?
When a new issue VCT or EIS is bought, the purchaser receives a share certificate and a tax certificate. The tax certificate is sent to HM Revenue & Customs to claim the income tax relief.
Those investors paying tax under PAYE can choose to have their tax code adjusted immediately to pay less tax, or can apply for an immediate tax repayment if they are investing at the end of the tax year.
Table of cash flows based on targeted returns
A worked example of a VCT
If someone contributed a total of £100,000 into a VCT in this tax year, the situation would look as follows:
• £100,000 gross investment
• £30,000 tax relief * (direct or through tax code)
• £70,000 net investment (assuming held for five years minimum)
• Targeted payments of £6,000 every year (tax free), 8.6 per cent annual yield on net investment.
• Targeted total returns, dividends and final capital repayment, dividends, £30,000 (tax free), £30,000 tax relief receivable in year one, capital returned, £100,000, total £160,000.
In summary, an investment of £100,000 creates a return of £160,000 in five years, after costs.
*assuming sufficient tax paid already
A worked example of an EIS investment
If someone contributes a total of £100,000 into an EIS in this tax year, the situation would look as follows.
• £100,000 investment.
• £30,000 tax relief * (direct or through tax code).
• £70,000 net investment (assuming held for three years minimum).
• No targeted payments during the life because these payments are not tax free.
