Tax Efficient Investing article written by Duncan Philp for dundee Courier 14 february 2012

FEB 15, 2012

Tax Efficient Investments EIS & VCT

There are many ' tax reducing' options available to investors for example the ones that come to mind are normally Pensions and ISA accounts however one investment method which is not used to the extent it should be is a Venture Capital Trusts (VCT) and Enterprise Investment Schemes.

If you can pick an experienced management team with the right infrastructure a VCT should provide excellent tax free returns, without correlation to the other assets in your portfolio as well as offering 30% income tax relief in the tax year. VCT can provide investors with exposure to the most exciting, dynamic and rewarding investment sector there is, early stage companies on the point of expansion.

What is an Enterprise Investment Scheme?

The Enterprise Investment Scheme (EIS) was established on January 1st 1994 as a successor to the Business Expansion Scheme (BES). An EIS allows you to mitigate your tax liabilities by buying shares in a company that has received EIS approval from HM Revenue & Customs.

Tax Benefits

Enterprise Investment Schemes can help investors generate an attractive return by delivering a range of tax benefits:

• 30% upfront income tax relief if the investment is held for three years
• Income Tax relief can be carries back to previous year (this will be at 20%)
• Potential Capital Gains Tax deferral (up to the amount of the gain invested)
• Tax-free growth & returns
• BPR qualifying after 2 years
• Loss relief

WHAT IS A VENTURE CAPITAL TRUST?

VCTs were introduced by the UK Government in 1995 to encourage individuals to invest in UK smaller companies.

The Government achieved this by offering investors in VCTs a series of very attractive tax benefits. As a result of these tax benefits, more than £4 billion has been invested in VCTs between 1995 and 2010.

All VCTs are quoted limited companies whose purpose is to invest shareholders' funds in smaller unquoted trading companies, (including AIM listed stocks) having potential for growth, with a view to making profits.

As such, all VCTs have independent directors whose objective is to protect the interests of the individual investors in the VCT.

TAX RELIEFS

VCTs can help investors generate an attractive return by delivering a range of tax benefits:

 Upfront income tax relief of 30% on the amount invested.

(provided that you hold the shares for five years and subject to a minimum investment of £3,000 and a maximum £200,000 per person per tax year).

Dividends paid to you by VCTs are tax-free.

Capital gains when you sell your shares in a VCT are tax-free.n

I

In hindsight everyone probably wishes they could have bought into Google, Microsoft or Apple before they hit the stock market but very few people had the foresight to invest capital at that stage of a company’s life cycle.

This is precisely why the UK Government introduced VCTs.

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