‘How do VCT and EIS products work alongside a pension?’
I’ve maxed out my pensions lifetime allowance of £1,055,000 and am looking for alternative ways to invest my money in a tax efficient way. Can you explain how VCTs and EIS product work?
Tom Selby, AJ Bell Senior Analyst says:
ISAs are the best known alternative to pensions, allowing you to contribute up to £20,000 a year and invest in stocks, bonds and funds around the world without paying any tax on the gains you make. Furthermore, you can withdraw funds from ISAs tax-free.
Beyond pensions and ISAs, there are alternative vehicles designed to encourage people to invest in certain types of companies. Two of the main types of schemes are venture capital trusts (VCTs) and the Enterprise Investment Scheme (EIS).
Individuals aged 18 or over can receive income tax relief at 30% on investments of up to £200,000 a year in newly issued ordinary shares in VCTs, with relief given via a reduction in your income tax liability.
For example, if you had an income tax liability of £10,000 and invested £20,000 in VCT shares, the tax relief of £6,000 (30% of £20,000) would be deducted from the tax bill, leaving you with £4,000 to pay. Shares need to be held for at least five years to qualify for income tax relief.
Dividends from VCTs of up to £200,000 are also tax-free and there is no capital gains tax (CGT) to pay when you dispose of your shares.
EIS products also offer tax relief of up to 30% on qualifying investments, with a significantly higher limit on investments of £1m in a tax year.
Tax relief is applied in the same way as for VCTs. Disposals of shares at a profit are usually exempt from CGT, provided the shares have been held for three years. Income tax or CGT relief is also available for losses on disposals.
A third alternative, Seed Enterprise Investment Scheme (SEIS), operates in a similar way to EIS, but with income tax relief given at 50% on qualifying investments up to £100,000 in a tax year.
Both SEIS and EIS investments allow you to defer chargeable gains on any assets by reinvesting the gains in shares in qualifying companies, potentially allowing you to reduce your overall tax liability.
These tax incentives are specifically in place to encourage people to invest in smaller, early-stage, and therefore potentially riskier, companies. As a result, only certain companies can qualify.
You’ll need to do your own research to understand if they might be suitable for your personal circumstances. In particular, you should be mindful of the fact companies that qualify for these reliefs are likely to be high risk.
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Please note, we only provide guidance and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.