It has been argued that VCTs are lower risk due to the impact of one company failing having less of an effect on overall returns. However, if a holding does well it also contributes less than would be the case with a smaller number of investments. So EISs have the potential for both bigger losses and gains but also potentially qualify for share loss relief.
It should also be noted that profits from the sale of a company within a VCT may be absorbed by the fund and utilised to pay tax-free dividends across the fund, thereby meaning individual investors are unlikely to see all of the upside of any successes. With EIS investments, the individual investor is the beneficial owner of the shareholding, not the fund, and therefore any upside is returned directly to the investor, subject to any fund manager performance fees. In any standard risk rating, both EIS and VCT should be considered as high risk, so any notion that a VCT is less risky should only be contextualised within the fact that both are still high risk.
The notion of risk should, of course, always be considered as a whole diversified portfolio and recently Brian Moretta at Hardman & Co wrote an interesting report on how venture capital (including EIS and VCT) should be considered in all clients’ portfolios and can be done without affecting clients’ overall risk profiles.
Historically it was perceived that EIS capital tended to be focused on the earlier stage of a company’s growth cycle than VCT funding. However, as VCTs chase growth to feed returns it is accepted that these days VCTs are often investing alongside EIS capital.
So when comparing EIS vs VCT, the important consideration for any financial adviser is, ‘What does an investor need and want?’
If income tax relief and the possibility of tax-free income is their driver then VCT should be the first port of call. However, if they want that income tax relief but also have CGT which could be deferred, are keen to ensure their holding minimises IHT liability and would like the reassurance of share loss relief, then EIS offers a far wider range of tax planning opportunities.
Given this mixture of tax planning opportunities and the potential protection of loss relief, then it could well be argued that if investors are seeking growth rather than income, then EIS should be considered more prominently in financial planning.
To utilise EIS carry back to offset income tax from the 2020-21 tax year, then cash must be deployed prior to April 5 2022.
Andrew Aldridge is partner and head of marketing at Deepbridge Capital
