This is traditionally the time of year when the marketing and selling of Venture Capital Trusts and Enterprise Investment Schemes go into overdrive. Never mind that they are available year round, as the end of the tax year approaches, investors and their advisers start to focus on the tax planning aspects to these investments.
VCTs and EISs differ in detail but both offer tax breaks in return for funding small and start up businesses. There is deemed to be an economic benefit to the country as a whole in having a healthy environment for people to create businesses and, mainly because it can be fearsomely risky to give them money, generous tax reliefs are on offer.
The risks are twofold; firstly, there is the obvious risk that these businesses are more likely to fail than more established entities and, secondly, their shares are highly illiquid.
There are ways of mitigating these risks, though. The first is to diversify your holdings across a number of different offerings and managers. There may also be some sense in selecting a manager for your VCT (which hold shares in a number of companies) who has demonstrated some past success, not that we can take this as indicative of future performance but a consistent loser may be best avoided. For an EIS (which constitutes only one small business), having a reputable firm behind the offering should be high on the list of wants.
The liquidity risk is more problematic. There is no real secondary market for these shares so it is wise to be realistic about when you may see your investment again. There is the prospect of tax free dividends over the long run, to say nothing of the other tax benefits, which may include income tax relief and IHT exemption (for EISs) but investors should be sensible about how much they commit and be prepared to be in it for the duration.
