In the first of a new series of tax-planning articles for Professional Adviser, Jack Rose puts the case for tax-advantaged investments such as enterprise investment schemes and venture capital trusts.

Enterprise investment schemes (EISs), venture capital trusts (VCTs) and business relief products are by no means new in the market place. Business relief – which until recently was known as Business Property Relief or ‘BPR’ – was first introduced in the 1976 Finance Act. For their part, EISs replaced the old Business Expansion Schemes in 1994 while VCTs were introduced in 1995.

While figures for assets raised in business relief schemes are hard to come by, the last tax year saw more than £2bn raised across EISs and VCTs. According to HMRC and AIC data respectively, since inception, EISs have attracted more than £14bn and VCTs more than £5.6bn into the UK small and medium-sized enterprise (SME) sector.

Despite all three structures having an established market with a 20-year-plus track record – and even though recent changes in both government legislation and pension rules have made the investment case even more compelling – many financial advisers still do not include them in their tax-planning arsenal.

The introduction of the so-called ‘GAARs’ (general anti-abuse rules) and ‘DOTAS’ (disclosures of tax avoidance schemes) regimes has been described as the ‘kiss of death’ for aggressive tax avoidance schemes – as demonstrated by a number of high-profile cases in the tabloids over recent years.

This, in combination with the Retail Distribution Review’s ‘whole of market’ legislation, is now leading many advisers to look towards government-approved EISs, VCTs and business relief products for their tax-planning needs.

Why Does The Government Give Tax Breaks?

EISs, VCTs and business relief each offer a number of distinct tax incentives allowing them to fulfil different requirements in an investor’s portfolio. VCTs, for example, offer tax-free dividends, meaning they may be more suitable to an investor looking to maximise income.

A golden rule of investment, however, is that you do not get anything for free. The government’s generous tax incentives associated with these vehicles are designed to offset the risk of investing in smaller, unquoted or AIM-listed companies. Furthermore, investments must meet certain criteria – both at the investor level (such as minimum holding periods to qualify) and the underlying investee company level (such as a maximum revenue size or number of staff).

The increased risk nature of these strategies means they are not suitable for everybody. For the right investor, though, they can form an important and complementary part of their overall portfolio.

Jack Rose is head of tax products at LGBR Capital

Please click here to read the full article on Professional Advisor

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