FAQs - Tax efficient investment options

What is an EIS?

An EIS is an investment vehicle that takes advantage of tax breaks to encourage investment in small companies. It pools money from investors and buys shares in companies. These companies could have assets worth as little as £250,000 and they are normally privately owned, although some EIS schemes invest in companies listed on Alternative Investment Market (Aim).

What is a VCT?

VCTs are fully listed companies and their shares are traded on the London Stock Exchange. Nevertheless it is often difficult to re-sell VCT shares because, whilst they are listed, the market in them is commonly illiquid because there tend to be few buyers. They are similar in structure to Investment Trusts. Primarily, they invest in small unquoted companies, or those listed on the Alternative Investment Market (Aim), that engage in qualifying trades in the UK. The qualifying rules make a number of exclusions including property, financial services and commodities.

How and when can I claim income tax relief for VCT and EIS investments?]

You cannot claim relief until you receive the necessary form, i.e. form EIS3 or EIS5.

Your claim can be made on the Self Assessment (SA) return for the tax year in which the shares were issued. Where shares are issued in the first six months of the tax year (i.e. before 6 October), the investor may claim to have up to half of the relevant shares treated as issued in the previous tax year. This is subject to a maximum carry-back of £50,000 where £100,000 or more has been invested in the first six months.

Claims to relief can be made up to five years after the first 31 January following the tax year in which the investment was made.

Is there a limit for capital gains tax deferral relief, on EIS investments, and when does this relief have to be claimed?

There are no minimum or maximum amounts for deferral.

The gain can arise from the disposal of any kind of asset, but the investment must be made within the period one year before or three years after the gain arose.

There is no minimum period for which the shares must be held; the deferred capital gain is brought back into charge whenever the shares are disposed of, or are deemed to have been disposed of under the EIS legislation.