Tax-Efficient Investments: VCT and EIS

Having specialised in tax-efficient investments for over a decade, I am passionate about helping clients reduce their tax burden in order to save more for the future of themselves and their families. As the end of tax year approaches, many people will first look to their pensions and ISAs to make tax-efficient savings. However, these options each have annual allowances in place, and so for those who have already maximised these or are higher rate taxpayers, further tax-efficient investments should be considered.

Venture Capital Trusts (VCTs), as well as Enterprise and Seed Enterprise Investment Schemes (EIS and SEIS), are government-backed schemes set up to encourage investment in new businesses. Whilst these schemes have similarities, including tax relief for experienced investors, they do also have some differences which allow them to be used in various scenarios.

I have used these schemes with one of my clients, Katherine, for a number of years in order to assist her in planning for retirement in a tax-efficient manner. Katherine is in her fifties and has already reached the lifetime allowance for pensions, and is reluctant to pay more into her pension scheme due to the 55% tax charge that would be applied. Therefore, we needed to look at other suitable options for saving and investing her wealth.

As an additional tax rate payer, after maximising Katherine’s ISA allowances, we would usually have £50,000 left to invest annually in other ways, to help to further reduce her tax bill.

In order to reclaim some of the tax Katherine has paid, I introduced her to VCT investments which would provide 30% (£15,000) of the invested income of £50,000, typically within 6-8 weeks from investment. From 6-12 months after investing, she would also typically receive a tax-free amount of around 5%. Most VCTs usually start to pay an income of this level within the first year. In this tax year, Katherine was able to save £15,000 in tax and received £2,500 tax-free income (usually otherwise subject to Income Tax at 45%), saving a further £1,125.

When I first met Katherine, she owned a rental property, although the changes in the rules around these properties made her more inclined to sell and her current tenant offered a reasonable market price for it. However, due to the £200,000 gain on the property, Katherine was concerned about the 28% capital gains tax (£56,000) that would apply.

For this tax year, we used EIS investment rather than VCT, as you can defer capital gains tax within an EIS investment, while still receiving the Income Tax at 30% of the investment amount. By investing £75,000 in EIS shares, Katherine could reclaim £22,500 of this in Income Tax relief as the amount invested is greater than the gain. This meant that the £56,000 gain was deferred and Katherine also receives benefits from Business Relief on this after two years as well, meaning there is no added Inheritance Tax liability which, at the current 40% rate, would have otherwise been £30,000. As well as this saving, in this tax year, Katherine saved approximately an additional £22,500 whilst still making an added £56,000 from the property sale.

By putting these tax-efficient plans in place, Katherine was able to save approximately £16,125 in tax bills per annum. This exercise, along with the one-off EIS investment, saw Katherine save a total of £126,875 towards retirement within just four years.

Tax planning is a complex area that requires professional advice, especially considering that every client has different individual circumstances and personal goals. Integrity365 has a robust Central Investment Proposition that is closely monitored and reviewed regularly. If you are interested in learning more about tax-efficient investments for higher-rate taxpayers, please do not hesitate to get in touch with an Integrity365 Independent Financial Adviser.