Taking exposure to venture capital in your portfolio – EIS and VCT investments
WHILE Northern Ireland is forging a place as a destination for early stage technology companies to pursue rapid growth, less well known are the personal tax incentives offered to UK high net worth investors in such businesses.
This is surprising when these tax incentives are among the most generous reliefs of their kind worldwide and have now existed in one form or another for well over two decades.
There are two core investment products which allow for investment in such early stage, high growth companies whilst facilitating such tax reliefs - Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCT).
Both EIS and VCTs are UK government-backed initiatives designed to mitigate some of the risk of investing in early stage businesses whilst maintaining the upside (or reward) of successful investments. The UK government incentivises investors by bearing a significant amount of the risk via tax reliefs.
The most generous relief common to EIS and VCTs is 30 per cent income tax relief on invested capital. What this means in practice is for every £1 invested into a VCT or an EIS eligible company, an investor receives 30p of income tax relief.
Investors can opt to use this relief in the current tax year or for EISs investors can carry back reliefs to the previous tax year, meaning that their effective exposure to the investment is 70p per £1 of capital. Any gains on successful, eligible companies are not subject to capital gains tax or income tax.
The investment universe for EIS and VCT has undergone significant change over recent years, with rule changes regarding what types of companies qualify, meaning the space now exclusively focuses on high growth, early stage investments with substantial risk.
What makes this space particularly interesting for investors currently is that there are now a small number of high quality EIS and VCT managers who are offering access to institutional quality investments which have formerly been the preserve of institutional venture capital funds which are typically only available to institutional investors.
Typical companies which EIS/VCT managers choose to allocate investor capital to are focused on the technology sector, with a goal of disrupting a well-established industry or sector.
A number of companies funded by managers we work with have gone on to become household names – for example Zoopla, one of the earliest disruptors of the traditional estate agent sector, or Secret Escapes which successfully disrupted the traditional travel agent model.
While EIS and VCT structures have certain features in common, there are important differences between both. Crucially, VCTs are UK closed-end collective investment schemes, meaning an investor owns shares in the VCT, rather than the underlying companies (an established VCT will typically hold over 30 companies within its portfolio, all of which an investor has exposure to).
EIS managers, in contrast, facilitate investments for their clients directly into the companies themselves, so a client directly holds shares in private businesses. A manager will typically facilitate these investments in around ten companies over the course of roughly 1-2 years, though these parameters can vary by manager.
Managers then facilitate divestments, or “exits” for investors in subsequent years on an individual company basis. The VCTs are companies themselves, which are generally listed entities on the London Stock Exchange. As a result, VCTs trade in a secondary market on the London Stock Exchange, offering investors liquidity.
EIS and VCT investing encompasses a number of risks and issues that investors need to consider prior to investing. For example, smaller companies have higher failure rates than more established companies and it is possible for an investor to lose the whole of their capital. However, the impact of the loss may be mitigated in part (but not all) by tax reliefs where applicable.
:: Jonathan Sloan is a director at Barclays Wealth and Investments NI