The rising popularity of EIS and VCT investments

Since their launch in the mid-1990s, Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCT) have become popular features on the investment landscape. And both schemes still undoubtedly provide an attractive proposition for experienced investors.

What are these schemes?

EISs and VCTs were established to encourage investment in early-stage firms which typically struggle to raise capital. The rationale behind the initiatives is that their existence benefits the economy by promoting innovation amongst the small higher-risk business community, which in turn drives up productivity, creates jobs and boosts economic growth.

And both schemes have been successful in terms of generating cash for the small business sector. Indeed, HMRC data shows that, since their launch in 1994, more than £20bn of funds has been raised through the EIS scheme, with 29,770 individual companies benefitting from investment, while VCTs have had a similarly positive impact raising £8.4bn of funds since their creation in 1995.

How they work

In essence, EISs and VCTs are simply investment vehicles which offer potential investors tax benefits for investing in small unquoted trading companies. In the case of the EIS, investors typically purchase shares directly in these firms, while VCTs are listed companies that allow investors to spread the investment risk over a number of companies by subscribing for shares in the VCT itself, a similar approach to investment trusts.

The rules relating to these schemes have changed over the years but, at the moment, both offer 30% income-tax relief upfront and tax-free capital growth, provided an EIS investment is held for at least three years and a VCT for five. The maximum amount anyone can invest in an EIS is £1m per tax year, or £2m for investments in ‘knowledge-intensive’ companies, while individuals can invest up to £200,000 each fiscal year in new shares issued by a VCT.

A growing market

Over the past 10 years, both the VCT and EIS markets have witnessed strong growth. According to recently released HMRC data, the amount invested in VCTs rose to £716m during the 2018/19 tax year, the highest level in over a decade and more than 3½ times the amount invested in 2008/09.

Although a tightening of rules relating to qualifying EIS companies has restricted the number of potential investment opportunities in recent years, the EIS market also remains strong. During 2017/18, the latest available period, £1.9bn of funds were raised under the EIS scheme, a similar level to each of the previous three tax years, but over 3½ times the amount invested in the comparable period a decade earlier.

Further growth expected

The growing popularity of these schemes has largely been driven by cuts to pension allowances and restrictions on buy-to-let investing in recent years. As a result, EISs and VCTs are now among the few remaining tax-efficient investment avenues still available to wealthier investors. And this is expected to continue, making these products a particularly appealing proposition for many wealthy investors.