Tax Shelters

All the schemes on this page are UK government initiatives that offer very attractive tax incentives as well as exposure to investments outside of the mainstream. While the press tends to focus on negative stories about tax avoidance, it has always been a part of government policy to offer incentives to encourage certain types of investment.

Before you invest

A carefully selected portfolio of tax shelters can be a useful add-on to core investments such as ISAs and pensions.

Tax benefits are designed to compensate for some less attractive aspects such as:

  • Lack of liquidity
  • Higher risk
  • Higher costs

These negative aspects can outweigh the tax benefits, so careful selection is absolutely vital.

Case study:

VCTs

Venture Capital Trusts were created in 1995, so there is now a good length of track record. VCTs are funds quoted on the London Stock Exchange that invest in smaller businesses.

There are a number of different investment strategies:

  • Evergreen: VCTs that plan to exist indefinitely and generate dividend income. Exit will only be possible by selling shares in the market
  • Limited life: VCTs that intend to liquidate their portfolios after five years and return the proceeds to shareholders

Maximum investment:
£200,000 per tax year
Pros:

  • 30% Initial tax credit
  • Tax free dividends
  • No CGT on gains
  • Highly regulated

Cons:

  • High running costs
  • 5 year minimum holding period
  • Shares usually trade at a discount to net assets

Further information:

The Money Advice Service

EIS

The Enterprise Investment Schemes applies to investment in specific unquoted companies. Well over £1 billion was raised under the scheme in 2014/15 so it has been a popular success. However, this covers a wide range of proposals from those attempting to take as little risk as possible under the regulations, to those backing speculative start-up ventures.

Some promoters offer an EIS portfolio solution, in which investment is spread across several companies to diversify risk.

Maximum investment:
£1 million per tax year

Pros:

  • 30% Initial tax credit
  • Deferral of CGT
  • No CGT on gains
  • Loss relief
  • Usually IHT exempt after 2 years

Cons:

  • Highly illiquid
  • 3 year minimum holding period
  • Usually early stage and high risk
  • Costs can be high

Further information:

gov.uk

SEIS

Seed Enterprise Investment Schemes is similar to EIS but only applies to the smallest companies. In return it offers very generous tax reliefs. Early stage companies have a high failure rate and many of those that do survive may be unable to offer a satisfactory exit to investors.

If an investment does fail then you can potentially use Loss Relief to soften the blow.

Maximum investment:
£100,000 per tax year

Pros:

  • 50% Initial tax credit
  • CGT Reinvestment Relief (on 50%)
  • No CGT on gains
  • Loss relief
  • Usually IHT exempt after 2 years

Cons:

  • Highly illiquid
  • 3 year minimum holding period
  • Early stage and very high risk
  • Costs can be high

Further information:

gov.uk

SITR

Social Investment Tax Relief is the newest tax relief. It operates in a similar way to EIS but is open to social enterprises that have a defined and regulated social purpose. They can issue unsecured debt finance.

SITR has been slow to take off, partly because the maximum that can be raised by an organisation is approximately £250,000. An application to increase this to £5 million is awaiting EU approval.

Maximum investment:
£1 million per tax year

Pros:

  • 30% Initial tax credit
  • CGT Deferral
  • Potential for social as well as financial benefits

Cons:

  • Lack of track record
  • 3 year minimum holding period
  • Low cap on amount per organisation likely to result in higher risk and costs

Further information:

gov.uk

Important Information

The information set out above is included for information purposes only and is not an offer or an invitation to buy or sell or a solicitation of an offer or invitation to buy or sell or enter into any agreement with respect to any security, product, service or investment. Any opinions expressed do not constitute investment advice and independent advice should be sought where appropriate. All information is current as of the date of publication, subject to change without notice, and may become outdated over time.

Links to third party sites or pages are for information purposes only and such sites and pages are not part of this website or the responsibility of EQ Investors Limited and have not have been reviewed or verified by EQ Investors Limited. Following links to or from any other sites or pages shall be at your own risk.