The changes to pensions announced over the last year have made pensions an ideal way to accumulate funds. The initial tax relief on contributions coupled with knowing that from age 55 you can either access all of those funds or pass them on to the next generation free of Inheritance Tax on death have made pensions extremely attractive.
However, for some clients the restrictions on how much you can pay in and how big a pension fund you can accumulate tax efficiently (now limited to £1 million) mean that they are also looking for alternative tax-efficient investments to complement their pension planning.
Investments in the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCT) can be a way to supplement your pension planning whilst benefiting from considerable tax savings and they are often seen as being two government-endorsed methods for higher earners to invest tax efficiently.
The annual limit for investment in VCTs is £200,000 whilst the limit on annual investment in the EIS is £1m – having doubled from £500,000 in 2012-13 – and there’s another £100,000 allowance on offer each year, courtesy of the seed enterprise investment scheme (SEIS).
EISs and VCTs raise funding for small businesses; those worth below £15m in the case of VCTs and the EIS, and firms worth less than £200,000 with the SEIS. Both the EIS and VCTs schemes attract significant tax breaks for investors, offsetting the inherently higher risks associated with investing in small companies.
Income tax relief of up to 30 per cent of the cost of shares is available on initial investments and any returns are exempt from capital gains tax (CGT). However, unlike EIS holdings, VCT shares are listed and investors can be paid tax-free dividends. They have to be held for five years to qualify for tax reliefs though, whereas EIS investments need only be held for three.
It’s important to remember that VCTs and EISs are high-risk investments in small unlisted companies and should therefore only form a small part of a well-diversified investment portfolio.
Our team of independent financial advisers at Milsted Langdon Financial Services Limited are acknowledged experts in the financial services marketplace. To find out what we can do for you, contact us and speak to one of our specialists.