Is EIS worth the extra admin?

Some investors we speak to often regard Venture Capital Trusts, or VCT’s, as the go-to choice for tax planning and accessing venture capital investment. But, is this a fair assessment, and what do the other options look like? 

We explore using VCT’s vs EIS funds when looking to invest and why often the extra admin may not be worth it.

What are EIS investments? 

The enterprise investment scheme, or EIS, is a government incentive that provides a good source of funding to early stage companies, while offering tax benefits to investors. EIS funds are often a more popular choice for investors even though they come with more paperwork,  as they bring more benefits than VCT’s as well as the same 30% income tax relief. 

There’s often an unfair assumption that EIS funds are inherently riskier than VCT funds, when in reality, they just target different things.

What are VCTs and why are they poular?

A venture capital trust, or VCT, is a publicly listed investment company run by a fund manager. It raises money by investing in small entrepreneurial companies and helping them grow.  

VCTs are often seen as the go-to tax planning tool of choice as the admin process is cleaner for a VCT. Once they’ve invested, investors receive one VCT share certificate, usually weeks after investing, instead of several EIS3’s sometimes months later.

From an investment perspective, it gives investors solace in knowing and having oversight on the portfolio they’re due to buy shares in. There’s an argument that more due information can be gleaned prior to investment for EIS, but as we mention, they target different things.

VCT Vs EIS

There are several investment factors that need to be taken into account when deciding between a EIS or VCT that often fall by the wayside due to admin. The main differences between VCT and EIS are:

Capital gains tax - When capital gain has been incurred, the tax can be offset via an investment into an EIS. A VCT will only save the 30% income tax and do nothing for the tax on a property or share portfolio sale.

Carry back - Investors can elect for all or part of their EIS shares acquired in one tax year to be treated as though they had been acquired in the previous tax year. This can be huge positive to investors who have additional funds to invest in the current tax year, compared to last.

Inheritance Tax -EIS can be used as a powerful tool for IHT planning, specifically in combination with other inheritance tax planning vehicles that don’t offer income/CGT benefits.

From our perspective, there are two very different reasons as to why you would invest into an EIS over a VCT.

The first is income vs growth

VCTs are often an income-producing fund. Most funds on the current market produce between 5-7% tax free income per year. Whilst there’s nothing wrong with this, it’s candidly different to the objectives set by the majority of EIS funds who target growth. 

VCTs aim to keep a steady net asset value and produce an income for clients. Over the course of a 5 year investment, they gain between 25%-30% of return. A standard target for EIS funds would be 250% return over 6-7 years.

After speaking to our own clients on the difference between these strategies, we find that typically those who don’t need the income would rather the growth potential of an EIS fund.

The second is diversification

There are currently more EIS funds available on the market than there are VCT funds. As the time of writing this, there were 21 active EIS funds raising capital vs 9 VCT funds open for funding on popular tax platform, Wealth Club. Of the 9 VCT funds currently raising capital, 8 are ‘generalist funds’ with a technology leaning.

Of the 21 EIS funds, there is a range of sub-sectors including technology, sustainability, life sciences, university spin outs & media, to name a few.  For investors looking for a well-diversified portfolio of sub-sectors or access to specific industries such as climate tech, it’s often very hard to find this solely within VCT funds.

Ultimately, whilst both investment options offer different advantages to investors, depending on what their financial situation is, EIS and VCTs are quite different beasts. Whether you choose or are advised to choose either it should depend on your own particular, individual circumstances and or crucially what your aims are.

Want to learn more about either EIS funds or VCT’s? Email our team - info@oneplanet.capital today.