In recent years, Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT) investments have gained significant popularity amongst wealthier investors. And both schemes undoubtedly remain an attractive proposition for experienced investors looking to maximise tax-efficiency and diversify their portfolios.
Attractive investment opportunity
A key benefit associated with EISs and VCTs, and a more recent addition to this stable, the Seed Enterprise Investment Scheme (SEIS), is the tax benefits they enjoy. This point has increasingly come to the fore as tax advantages afforded to other investments, most notably pensions, have been squeezed. As a result, EISs and VCTs are increasingly recommended to investors who are close to breaching pension allowances but still want to save for retirement tax-efficiently.
These schemes are more than mere tax tools though as they provide important diversification benefits too. For instance, the types of investments held in EISs and VCTs inevitably mean they have low correlation to mainstream ISA and pension products which typically invest in larger firms. This makes them an appealing proposition for wealthy investors seeking greater portfolio diversification.
Potential risks…
However, while there are certainly plenty of benefits associated with these schemes, they are only suitable for investors who are comfortable holding high-risk investments. This enhanced risk element stems from the fact that EISs and VCTs invest in small, fledgling and therefore typically fragile enterprises.
Although some of these companies will undoubtedly flourish and deliver strong returns, many will inevitably fail. As a result, these schemes have a high-risk profile, which is something any prospective investor needs to take into account. This also means that EIS and VCT investments are only suitable for a relatively small proportion of an investor’s overall portfolio.
…but potentially high rewards
For anyone prepared to take the risk, however, these schemes do offer the potential to deliver high returns and, in recent years, both EIS and VCT investments have performed strongly. For instance, according to data from the Association of Investment Companies (AIC), the average generalist VCT delivered a 140% total return over the past decade, while the top 16 VCTs all at least doubled investors’ money on a net asset value return basis over that period.
Investments worthy of consideration
Although it is important to remember that not all VCTs have performed strongly over the last decade and that choosing the right fund manager is paramount, the AIC data does certainly highlight this sector’s potential for generating impressive returns. It is therefore perhaps not too surprising that a growing number of investors are choosing VCT and EIS investments, particularly as a companion to pension savings.
Indeed, so long as the risks are fully understood, these schemes are worth consideration for any wealthy investor seeking a long-term investment that maximises tax-efficiency and provides portfolio diversification.