How To Profit From Tax Efficient Investments Now

How To Profit From Tax Efficient Investments Now
Underwater by Andy Deitsch. Why?

With Tax Efficient Investments expected to come under the spotlight in the Autumn Budget of 2017, now's a good time to get to grips with their features and benefits, and how they might work for you.

Following successive tax benefit reductions on SIPP and SSAS, tax efficient investments offer experienced and affluent investors the opportunity to profit from complex and higher risk investment opportunities.

The Types Of Tax Efficient Investments

Venture Capital Trusts

Enterprise Investment Schemes

Seed Enterprise Investment Schemes

Business Relief Schemes


Tax Efficient Investments

Venture Capital Trusts

Venture Capital Trusts (VCTs) are pooled funds that are listed on the stock exchange. They invest in a range of businesses and offer generous tax benefits. They’re considered high risk as they invest in smaller, earlier stage companies.

VCT Tax Benefits

VCTs offer you a number of tax benefits:

  • A 30 per cent Income Tax rebate on investments up to £200,000 per tax year (as long as you have paid the amount of tax being rebated and hold the VCT for at least five years)
  • Tax free dividends
  • No Capital Gains Tax when you sell your VCT

Into Which Companies Do VCTs Invest?

At least 70 per cent of the VCT’s assets must be invested in small or earlier stage businesses that are either unquoted or listed on the Alternative Investment Market, the London Stock Exchange’s market for growth companies.  The companies must be independent and carry out a ‘qualifying trade’ as defined by HMRC.

What Are The Risks With VCTs?

VCTs are higher risk because they invest in small companies, which can struggle and fail. These companies can also be illiquid, making it difficult for the VCT manager to sell their shares. Shares in VCTs themselves also tend to trade at a discount, so you could lose money if you need to sell them at short notice.

Who Should Consider VCTs?

VCTs are specialist, higher risk investments that might only be suitable for you if you have a high tolerance for risk and you can remain invested over the long term.  They are generally only suitable for investing a small portion of your overall portfolio.


Tax Efficient Investments

Enterprise Investment Scheme

The Enterprise Investment Scheme (EIS) encourages direct investment into small and earlier stage UK companies. Like VCTs, they give you tax benefits to offset the extra risk of investing in these companies.

Direct Investment Into Companies

Unlike VCTs, which invest in a variety of companies, an EIS is a direct investment into a single qualifying company. However, EIS funds that invest in a number of qualifying businesses also exist. EIS investments usually have a lifespan of four to ten years.

Which Companies Qualify For EIS?

To qualify for EIS investments, companies must:

  • Be unquoted (not listed on the stock exchange)
  • Have fewer than 250 full time employees
  • Have gross assets of less than £15 million (£16 million after investment)
  • Be within seven years of their first commercial sale (or 10 years for knowledge-intensive companies)

EIS Tax Benefits

The Government offers several tax benefits to EIS investors:

  • 30 per cent Income Tax rebate on investments up to £1 million (as long as you have paid the amount of tax being rebated and stay invested for at least three years)
  • You can defer capital gains you have incurred from other investments
  • If you make a loss on an EIS investment, it can be offset against your income or capital gains in the same year
  • A ‘carry back’ feature where your shares can be treated as being bought in the previous tax year
  • EIS investments grow free from Capital Gains Tax, as long as you have claimed and retained your initial Income Tax relief
  • After two years, an EIS investment becomes eligible for Business Relief and is free from Inheritance Tax

Who Should Consider EIS?

EIS investments are higher risk. They might only be suitable for you if you can tolerate this risk and hold your investment over the medium to long term. Due to their size, EIS companies can struggle or fail, and their shares can be difficult to sell. For this reason, they should generally only form a small part of your overall portfolio.


Tax Efficient Investments

Seed Enterprise Investment Scheme

The Seed Enterprise Investment Scheme (SEIS) was launched in 2012 to encourage investment into start-ups. It’s similar to VCTs and EIS but invests in smaller, riskier companies and therefore offers a higher level of tax relief.

SEIS Tax Benefits

SEIS investments come with generous tax benefits:

  • 50 per cent Income Tax rebate on investments up to £100,000 (as long as you have paid the amount of tax being rebated and stay invested for at least three years)
  • 50 per cent Capital Gains Tax reinvestment relief, enabling you to offset any other capital gains from the same year up to half the value of your investment
  • SEIS investments are not subject to Capital Gains Tax, as long as you have claimed and retained your initial Income Tax relief
  • After two years, an SEIS investment becomes eligible for Business Relief and is free from Inheritance Tax
  • If you make a loss on an SEIS investment, it can be offset against your income or capital gains in the same year or the previous year

Companies That Qualify For SEIS

SEIS investments are made into smaller companies than VCTs or EIS. These are generally small start-ups that need funding in order to expand. The companies must be unquoted and less than two years old. They must have fewer than 25 employees, with gross assets of less than £200,000. In total, they can raise no more than £150,000 from investors.

Who Should Consider SEIS?

The qualifying companies involved in SEIS must be much smaller and are likely to be far riskier propositions in commercial terms. They are therefore only likely to be suitable if you’re a very experienced investor with a very high tolerance for risk, and may only be suitable as medium or long-term investments. They’re also generally only suitable for a small part of your overall portfolio.


Tax Efficient Investments

Business Relief Schemes

Business Relief reduces the amount of Inheritance Tax your beneficiaries may have to pay. It’s available to anyone who has owned all or part of a qualifying business or asset for at least two years.

What Qualifies For Business Relief?

Business Relief can be claimed in full for:

  • A business or an interest in a business, including a sole trade and partnership
  • Shares in an unlisted company

Business Relief can be claimed at 50 per cent for:

  • A controlling shareholding in a listed company
  • Land, buildings and machinery owned by the deceased and used in a business they controlled or in which they were a partner
  • Land, buildings and machinery used in a business and held in trust

Business Relief Exceptions

There are several exceptions that do not qualify for Business Relief. These include companies that:

  • Mainly deal with securities, shares, land or buildings, or in making and holding investments
  • Not-for-profit organisations

Businesses being sold, unless the sale is to a company that will carry on the business and the estate will be paid mainly in shares of that company


Open your mind to tax efficient investments.  You could be pleasantly surprised!

tax efficient investments

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As SIPPclub neither advises on, nor arranges, nor recommends specific investments or strategies, we're unable to say whether a SIPP or SSAS or any investment within it is right for you. Ultimately, it’s your money and your decision, and you should only proceed once you're satisfied you've undertaken sufficient due diligence. If you need advice, you should speak to your trusted adviser, or you could find a local adviser from Unbiased.co.uk.  Alternatively, we'd be pleased to introduce to a suitably qualified independent financial adviser.

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IMPORTANT INFORMATION ABOUT TAX EFFICIENT INVESTMENTS

The value of tax efficient investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested. This is not advice to invest, or not to invest.  Venture Capital Trusts, Enterprise Investment Schemes, Seed Enterprise Investment Schemes and Business Relief Schemes should all be regarded as high risk investments. They are only suitable for UK resident taxpayers who can tolerate higher risk and have a time horizon greater than five years. This page does not constitute personal advice. Prevailing tax rates and reliefs are dependent on your individual circumstances and are subject to change. If you are in any doubt as to the suitability of a tax efficient investment, please seek the advice of a suitably qualified independent financial adviser. SIPPclub does not provide legal, financial or tax advice of any sort. Advice in relation to Inheritance Tax planning is not regulated by the Financial Conduct Authority, but the products used in relation to trusts and to mitigate tax may be regulated.