What tax relief can investors enjoy with VCTs, EIS and SEIS?

Investing in British start-up companies can yield spectacular returns. Since 2000 the UK has produced around 400 high-growth tech startups with a value of $250 million or more. It was also home to more than 144 unicorn companies (firms worth $1 billion and above) as of the end of 2022.

Yet investing in early-stage companies also involves taking on higher risk than, say, buying shares in the more mature businesses that trade on the London Stock Exchange’s main market. This is why investing in early-stage businesses are often considered by experienced investors.

So to redress this risk/reward balance and encourage investment in start-ups, the government has introduced various types of tax relief. These are known as:

• The Venture Capital Trust (or VCT).
• The Enterprise Investment Scheme (or EIS).
• The Seed Enterprise Investment Scheme (or SEIS).

The following table roughly explains the various types of tax relief that investors can enjoy with these schemes.

	VCT Relief	EIS Relief	SEIS Relief
Income Tax	Income tax relief stands at 30% for new share subscriptions.   Annual relief applies to a maximum investment of £200,000.   Dividends are not subject to income tax.   Shares must have been held for a minimum of five years to qualify.	Income tax relief stands at 30% for new share subscriptions.   Annual relief applies to a maximum investment of £1 million (or £2 million for Knowledge-Intensive companies*).   Relief can be carried back to the previous year to reduce that year’s tax liability (depending on the annual limit for the previous year).	Income tax relief stands at 50% for new share subscriptions.   Annual relief applies to a maximum investment of £100,000.   Relief can be carried back to the previous year to reduce that year’s tax liability (depending on the annual limit for the previous year).
Capital Gains Tax (CGT)	No CGT is payable when shares are sold.	CGT relief stands at 100% when shares are disposed of, provided an investor has claimed Income Tax relief.   Capital gains from any asset that are invested in an EIS can be deferred for any period in which the shares are held.   If shares are sold at a loss, investors can set the loss amount (minus any Income Tax relief) against their income.   Shares must have been held for a minimum of three years to qualify.	CGT relief stands at 50% when shares are disposed of, provided an investor has claimed Income Tax relief.   If shares are sold at a loss, investors can set the loss amount (minus any Income Tax relief) against their income.   Shares must have been held for a minimum of three years to qualify.
Inheritance Tax (IHT)	None	IHT relief stands at 100%, provided that the shares are held for a minimum of two years and at the time of death.	IHT relief stands at 100%, provided that the shares are held for a minimum of two years and at the time of death.

Venture Capital Trust

VCTs are private equity companies whose shares are traded on the London Stock Exchange. When a person invests in one of these entities, they are buying a stake in the trust and not in any of the early-stage businesses they hold.

The companies that VCTs invest in can either be privately owned or listed on London’s Alternative Investment Market (AIM). Many of these early-stage companies have grown to become giants in their industries and include the likes of property listings giant Zoopla and car retailer Cazoo.

VCTs can invest up to 15% of their money in a single company. There are strict rules on what businesses they can invest in, and they usually hold anywhere from a couple of dozen companies to well over 50.

Enterprise Investment Scheme

The EIS also focusses on early-stage companies. But unlike VCTs they are focussed on privately-owned businesses rather than AIM-quoted companies.

EIS funds also tend to invest in a much-smaller pool of companies. In fact the figure usually sits in single figures, an attribute that means they pose higher risk to investors’ funds.

Seed Enterprise Investment Scheme

The SEIS concentrates on even smaller businesses than an EIS. They can also be earlier stage than those held by its sister scheme, a factor that further increases the risk investors are exposed to.

SEIS funds also tend to invest in a smaller selection of companies than VCTs, meaning they offer less protection through diversification.

The rules governing whether a start-up company qualifies under any of these schemes can be complex. They depend on an assortment of factors like gross asset value and employee numbers.

The information on tax relief included in this article is a broad rundown of what investors should expect. Individuals should seek more information on tax liabilities – as well as the risks associated with each of these schemes – before investing.

However, all of these schemes provides benefits and is hugely beneficial for start-ups and scale ups. If you are thinking of obtaining EIS/SEIS, please get in touch with our team of experts – we will be delighted to support your business!