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Last chance for tax relief

Created:
2 March 2007

The end of the tax year - 5 April - is the deadline for investing in the latest crop of VCT launches. It is also the deadline for using this year's EIS allowance, although not everyone need be in such a hurry.

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VCTs and EISs offer tax breaks for investing in small, early-stage companies, which must be no more than £7m in size at the time of investment. VCTs offer income-tax relief on investments, plus tax-free growth and income from the VCT. EISs also allow income-tax relief on investment and are not subject to capital gains tax (CGT), while unlimited gains can be sheltered from CGT.

But despite the tax incentives, they can be fragile investments and their risk profile has risen further following last year's cut in the maximum investee company size, from £15m. Indeed, interest in VCTs has waned because the new rules make them less attractive and because many investors will already have been exposed to them. Investors may prefer to top up their pensions (with tax relief at up to 40 per cent on contributions of up to £215,000).

VCT

VCTs now offer 30 per cent income-tax relief on investment in new shares (down from 40 per cent in 2004-06), with a minimum holding period of five years (up from three years). The maximum investment is £200,000 a year. Look for VCT managers with good track records, as some funds have been disappointing so far. You should also consider how you will exit - there is little demand for second-hand shares, so most managers now buy back shares to prevent them from trading at wide discounts to their underlying values.

There is, however, a new breed of limited-life VCTs, which intend to wind up just after the five-year minimum holding period. These will try to protect your initial capital but are unlikely to deliver significant growth.

Martin Churchill, editor of www.taxefficientreview.com, recommends Close Enterprise, ProVen, Baronsmead AIM, Foresight 2 and Sitka Health. He also backs Downing Protected and Triple Point, two of the limited-life offers. For more on VCTs, see the 1 December issue. Also visit www.bestinvest.co.uk.

Eis

Investments under the EIS allow income-tax relief at 20 per cent on investments of up to £400,000, with a minimum three-year holding period. You can also shelter unlimited gains by investing in EIS companies, provided the gains are made between three years before and a year after the EIS investment.

Gains made on the EIS itself are tax-free and any losses can be set against capital gains made elsewhere, which is not the case with VCTs. EIS dividends do not avoid tax, though. Another advantage of the EIS is that qualifying activities qualify for business property relief, which means holdings are exempt from inheritance tax after two years.

John Davey, of independent financial adviser Bestinvest, recommends investing in single pub companies for CGT deferral, as their asset-backing should protect against downside. He recommends Thistle Pubs III, which will hold eight to 10 pubs and has benefited from a relationship with larger chain Maclay Inns.

And if you're interested in potential growth from a portfolio of EIS firms (with income-tax relief), Mr Davey suggests Oxford Gateway Fund 4, which has a strong team of advisers. Its EIS funds have produced an average annual return of 18 per cent since 1999.

Mr Churchill backs Octopus Protected EIS Fund, noting it will invest in low-risk deals to protect capital. Approved EIS funds must invest 90 per cent of their assets in at least four companies in six months to benefit from immediate income tax relief.

For details of EIS offers, visit www.taxshelterreport.co.uk.

minimum
Single companies: pubs investment (£)
Single companies: films
Portfolios: primarily Aim
Portfolios: primarily unquoted (approved)
Portfolios: primarily unquoted (unapproved)
British Country Inns 3 5,000
Close Imperial Pub Company 5,000
Foundation Inns 5,000
Thistle Pubs III 2,000
Azure Films 35,000
Baker Street Media tba*
Cinecap tba*
Future Screen Ventures 35,000
Prescience Pictures 25,000
Prosper Capital tba*
Spice Factory tba*
Visible Films 10,000
Brewin Dolphin EIS Portfolio Service 50,000
Eureka from Octopus 50,000
Hargreave Hale 100,000
Noble EIS Aim Portfolio 30,000
Rathbones EIS Portfolio Service 50,000
Singer and Friedlander EIS Portfolio Service 50,000
Smith and Williamson EIS Portfolio Service 50,000
Williams de Broë EIS Portfolio Service 50,000
Axcess EIS Fund 2007 25,000
City and Merchant pre-IPO EIS Fund 30,000
LBA EIS Tracker Fund IV 20000
Octopus Protected EIS Fund 50,000
Braveheart Ventures EIS Fund 50,000
Calculus Capital EIS Fund 8 50,000
Foresight Sustainable Development Fund tba*
Longbow EIS Portfolio Service 50,000
MMC Ventures Co-Investment Fund 50,000
Oxford Gateway Fund 4 25,000
*to be announced
Source: www.taxefficientreview.com

*to be announced Source: www.taxefficientreview.com

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