Over the last couple of months, we have reviewed several investment strategies which offer individuals the potential to access valuable tax reliefs. We covered Enterprise Investment Schemes (EIS), Venture Capital Trusts (VCT) and Alternative Investment Markets (AIM).
Despite these strategies being significantly different in terms of how they are constructed, the types of underlying investments and the associated risks, the tax reliefs offered can be similar in some respects, but equally different in other aspects.
The table below summarises the main reliefs available for these three strategies:
|Enterprise Investment Scheme||Venture Capital Trust||Alternative Investment Market|
|Income Tax Relief||30%||30%||Nil|
|Income Tax Relief Carry Back||Yes – 1 Tax Year||No||No|
|Capital Gains Tax||Exempt after 3 years||Exempt||Yes*|
|Capital Gains Tax Deferral Relief||Yes||No||No|
|Inheritance Tax Relief||Yes (after 2 years)||No||Yes (after 2 years)|
|Minimum Holding Period||3 years||5 years||2 Years|
|Access to funds?||No||Yes||Yes|
*AIM portfolios can be held in an ISA wrapper where there would be no capital gains tax and the dividends would be tax free.
In addition to the potential tax reliefs available, it is important to consider the other factors, for example access to funds and minimum holding periods.
We now focus on the two most common tax reliefs investors are looking to benefit from, Income Tax Relief and Inheritance Tax Relief.
Income Tax Relief
Where an investor wishes to potentially reduce their income tax liability, they could consider, where appropriate and in line with their tolerance to investment risk and capacity for loss, investing in either an EIS or VCT.
Both offer the potential to receive income tax relief at 30% of the initial investment amount. However, in other areas they are significantly different.
Potentially the most important consideration is future access to funds. With an EIS, the investor has no access to the funds until the manager decides to sell the underlying companies. This will not be for at least three years but is likely to be well beyond 7 years depending on a number of factors.
In relation to a VCT, an investor can sell the investment at any point (depending on sufficient liquidity within the investment), should this be sold within 5 years of the initial investment, HMRC can claim back the income tax relief. Importantly, the investor controls when they access the funds.
Inheritance Tax Relief
Investors can look to reduce the value of their estate for Inheritance Tax purposes by investing in either an EIS or AIM portfolio, once again depending on their tolerance to investment risk and capacity for loss.
Whilst both EISs and AIM portfolios investments are exempt from Inheritance Tax after two years from date of investment, there can be differences in when the two year “window” opens.
EISs can take up to 12 to 18 months to allot funds for investment, importantly the allotment is the point that the two year “window” for the Inheritance Tax Relief starts, this could effectively increase the period for the investment to be exempt from Inheritance Tax up to 3 years and 6 months.
With Alternative Investment Market portfolios, as the underlying companies are trading on an index, the investment into an AIM portfolio should be actioned in a timelier manner, resulting in the two year “window” opening much sooner and the investment potentially being exempt from Inheritance Tax sooner than an EIS.
The above scenarios are simple comparisons, there are of course a number of other potential tax reliefs associated with the investment strategies covered which may be beneficial depending on circumstances. Hopefully the above illustrates that these investment strategies are not just a simple “lets invest in that for this potential tax relief”, it is important to consider all options available alongside the differences in areas like potential tax reliefs, investment risk and approach. These should then all be considered with an investor’s personal objectives, investment views and tolerance of investment risk.
Your Financial Planner will continue to consider these strategies where they feel they are suitable based on your individual needs and views, but should you wish to discuss any of the investment strategies covered in this article or the previous articles, then please contact your Financial Planner directly.