Despite 2022 being a bumper year for venture capital trusts (VCTs), recent data provided by Deepbridge Capital suggests that of the two major tax-advantageous early-stage investment programmes in the UK, the Enterprise Investment Scheme (EIS) trumps VCTs in terms of popularity among financial advisers.
When asked whether they tend to use EIS funds or VCTs more often, 11% of financial advisers said they exclusively invest through the EIS, compared to just 2% who said they exclusively use VCTs.
Nearly a third use both government-approved schemes equally, with a further 26% stating that they use the EIS “predominantly” while using VCTs “when appropriate”.
Speed of deployment was cited as the primary factor for investing through the EIS.
“Given last year’s record fundraising by VCTs, you would be forgiven for thinking that they are the primary tax-efficient investment planning tool used by financial advisers, but this survey suggests otherwise,” said Andrew Aldridge, partner at Deepbridge Capital and board member of the Enterprise Investment Scheme Association (EISA).
According to the latest figures, in the 2020/21 period, 3,755 companies raised a total of £1.66bn under the EIS. In the year prior to the Covid-19 outbreak, a total of 4,165 companies raised £1.9bn.
In comparison, VCT fundraising actually increased during the pandemic, from £645mln in 2019/20 to £668mln in 2020/21.
However, this may have been due to unfavourable reforms implemented in the 2019 accounting period which introduced stricter guidelines around VCT investments.
Indeed, when looking back to 2018/19, VCT investments exceeded £716mln.
What is a VCT?
Venture capital trusts (VCTs) are listed investment vehicles providing exposure to high-growth, high-risk, usually unlisted companies.
VCTs are popular due to their tax benefits, offering tax relief of up to 30% on investments up to £200,000 and no tax on dividends paid out by VCTs.
Because of these tax reliefs, VCTs are popular among high-net-worth investors and individuals looking for added income on their retirement funds.
However, VCTs typically come with exceptionally high management fees of up to 3%.
You must hold your entire VCT investment for at least five years to obtain these tax benefits.
The VCT scheme was launched by the UK government in 1995 as a means of providing early-stage seed funding to start-up companies.
To qualify for VCT funding, companies generally need to have fewer than 250 staff members on the payroll and assets below £15mln.
However, VCTs are not required to sell their holdings once an investment exceeds these thresholds, making for some impressive returns in recent years.
Unicorns including Depop, Kazoo, Zoopla and Bought By Many were backed by two of the UK’s largest VCTs- Titan and Octopus.
Other major VCTs include Baronsmead, Albion, Northern and Pembroke.
What is an EIS?
The UK government-back Enterprise Investment Scheme (EIS) shares many similarities with VCTs, principally in that they offer incentives in order to provide early-stage seed funding to start-up companies.
The EIS provides a 30% tax benefit on your investment, but with a £1mln maximum investment threshold against VCTs’ £200,000, or up to £2mln if the first £1mln is invested in knowledge-intensive companies.
Dividends, however, are not subject to tax relief (though would rarely be paid out by early-stage companies anyway.
Unlike VCTs, EIS investments are not conducted through a listed vehicle. Instead, you can either invest directly with an EIS-compliant company, or through a specialist portfolio manager.
Popular EIS fund managers include Deepbridge Capital, Ascension Ventures, Force Over Mass Capital and Mercia Asset Management PLC (AIM:MERC).
Please note that none of the firms mentioned above are specifically recommended by Proactive.