What is Tax Efficient Investing?

Tax is a problem for all successful investors. There are a few important tax minimisation products out there but the most efficient are Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCTs). The reason that the tax breaks and advantages are in place is because these are high risk investments. The tax breaks are amended regularly at budgets but they involve a mixture of CGT deferral and Income Tax relief and inheritance tax breaks.

EIS

The purpose of this form of investment is to bring together young, innovative companies with high quality business ideas and potential investors in a tax efficient way. Companies with high growth potential, which qualify for the tax benefits of the EIS, are targeted for investment at an early stage so as to offer greater growth possibilities.

VCT

VCTs are companies listed on the London Stock Exchange, and are similar to investment trusts. They are run by fund managers who are usually members of larger investment groups. Investors can subscribe for, or buy, shares in a VCT, which invests in trading companies, providing them with funds to help them develop and grow. VCTs realise their investments and make new ones from time to time.

Top Tips:

  1. These investments are high risk as money raised is generally put into start up or early stage companies but if they do pay off they could make large sums of money.
  2. Look at the fund managers record of taking stocks to the market and the past performance of previous funds.
  3. VCTs are publicly listed entities so can be traded freely. Keep an eye on news relating to the VCT but be sure to understand the tax scenario when buying these stocks when not an initial investor.
  4. Fees are generally higher than Unit Trusts but this is down to the fact that managing these types of funds is generally more specialist than ISA’s and Unit Trusts for example.
  5. In order to qualify for tax relief these types of investments have to be held for a min of 3 years.
  6. Due to the high risk nature of these investments liquidity can be an issue so selling could take some time
  7. Never invest purely for tax reasons.
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