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How to Differentiate Between EIS, VCT, and SEIS

How to Differentiate Between EIS, VCT, and SEIS

In this article, we look at Enterprise Investment Schemes (EIS), Venture Capital Trusts (VCT) and Seed Enterprise Investment Schemes (SEIS). These products are often tested in various CII exams – most specifically R02, R03, J10, and AF4 but questions can sneak into R06, AF1, and AF5 as well.

This article is relevant to examinable tax year 2021/22.

Comparing Tax Benefits

All products offer a comprehensive range of tax breaks, acting as an incentive to invest in small unlisted and AIM-listed companies.  Here, we look at the main differences between the products starting with the tax benefits:

 
VCT
EIS
SEIS

Income Tax

  • 30% relief on investments up to £200,000

  • Dividends are tax free


  • 30% relief on investments up to £2m (excess over £1m must be invested in knowledge intensive companies)

  • Dividends are taxable


  • 50% relief on investments up to £100,000

  • Dividends are taxable


CGT

  • No reinvestment relief

  • Gains exempt (no minimum holding period)


  • Re-investment relief available to defer capital gains tax

  • Gains on disposal are exempt after 3 years


  • Reinvestment relief – 50% exemption on gains reinvested

  • Gains on disposal are exempt after 3 years


IHT

  • In the estate for IHT


  • IHT free after 2 years due to business relief


  • IHT free after 2 years due to business relief


Holding Period

  • 5 years


  • 3 years


  • 3 years

All three investments are considered high risk and can be illiquid.  EIS and SEIS are similar in that they are wrappers within which you invest directly in company shares. SEIS focuses on smaller, startup companies and is considered to be the younger sibling of EIS. The VCT is a pooled investments vehicle which works in a similar way to investment trusts: investors subscribe to shares in the trust, and the fund manager invests in VCT qualifying companies.

This article discusses Enterprise Investment Schemes (EIS), Venture Capital Trusts (VCT) and Seed Enterprise Investment Schemes (SEIS); these come up often in various #CII exams Click To Tweet

 

VCTs are suited to investors who wish to receive tax-free dividends, want to reduce their income tax bill and also perhaps for those who have maximised pension contributions. EISs are suited to those who want to take advantage of deferring capital gains tax, who want to reduce their income tax bill and who want to do some IHT planning.

The CGT deferral could be of particular interest to those who are planning on exiting the buy-to-let market.  A buy-to-let property will potentially be subject to CGT at the higher rates of 18% or 28%, which can be deferred if the gain is re-invested into an EIS.

SEIS also gives income tax relief but at the higher rate of 50% due to increased risk of investing in startup companies. SIES are also useful in IHT planning and provide reinvestment relief on up to 50% of CGT gains.

As we all know, tax should never be the main motivator for choosing a particular investment. With all of these products, there are risks: the risk that the company invested in will go bust, the investments each need to be held for a certain length of time for maximum benefit, and as we have said, the products can be difficult to cash in.

Grab the resources you need!

If you’re studying for your CII AF1 exam, and you’re wanting a feeling of confidence on exam day, grab our free taster to try out one of Brand Financial Training’s calculation workbooks for yourself.  Click the link to download the AF1 Calculation Workbook taster now!

Click here to download our free calculation workbook taster for CII AF1

Alternatively, you can download the taster for AF4AF5, J10R02R03 or R06 if you’re studying for one of those exams.