Support our nice British entrepreneurs – should you do not thoughts a bet

The Autumn Statement final week had disappointingly little help for savers and traders. But nestled in accompanying paperwork was one piece of fine information.

Chancellor Jeremy Hunt dedicated to extending the lifespan of two schemes that permit traders to help fledgling UK companies and entrepreneurs.

Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EIS) encourage traders to again new companies which are solely simply discovering their ft.

As they’re of their early phases, investing in these corporations is excessive danger. While some could develop into profit-making, bigger companies, a large quantity will inevitably fail and traders will lose cash.

So, in return for taking a danger, traders obtain beneficiant tax breaks, together with earnings tax reduction, capital features tax reduction and – within the case of EIS – even inheritance tax reduction. You can even benefit from the truth you’re supporting British entrepreneurs to seek out their potential.

In the combo: Design agency Bella Freud, Hackney Gelato and flower deliverer Floom had VCT funding

As they carry danger, these schemes ought to solely be utilized by individuals who perceive them and have used their different tax allowances – corresponding to Individual Savings Accounts and pensions – first.

However, utilized in the best means, they’ll generate enormous rewards. And it isn’t simply the ultra-wealthy who’re capable of profit from them.

What has modified?

VCT and EIS investments had a sundown clause, which was in place due to an EU directive. It meant that traders would not be capable of use them from April 2025.

In the Autumn Statement, the Government prolonged this to 2035. It stated: ‘To proceed supporting 1000’s of start-ups and small and medium-sized enterprises every year who face the most important challenges in accessing progress capital, the Government will legislate to increase the EIS and VCT to 2035.’

Nicholas Hyett at Wealth Club, which specialises in tax-efficient investments, says the announcement is nice information for the sphere.

He added: ‘It removes the uncertainty that has been lingering over the sector for a while, probably laying aside new entrants and new traders, and secures a vital supply of funding for the UK’s blossoming start-up scene.’

How the schemes work

VCT and EIS schemes spend money on younger UK corporations which are nonetheless privately owned. The hope is that if they’re supported by traders, they’ll develop quick and ultimately generate income.

VCTs and EIS investments permit traders to get in on the early phases and profit from that preliminary progress. Many will fail, through which case traders will lose their capital. But the hope is that some will blossom. Success tales that started off with VCT funding embrace property portal Zoopla, meals model Pasta Evangelists and garments retail web site Depop.

Historically, VCTs and EISs have been area of interest merchandise, however they’ve grown in reputation as ever extra traders max out their tax-free limits on Isas, pensions, capital features and dividends. Funds raised by VCTs exceeded £1 billion for the second yr operating within the 12 months to April, and EIS schemes raised greater than twice this sum.

VCTs are listed on the inventory market. A fund supervisor places collectively a portfolio, usually of 30 to 70 companies, and traders purchase shares within the VCT, reasonably than within the particular person corporations of which it’s comprised. The fund managers can solely buy corporations which are both not themselves listed, or listed on the London Stock Exchange’s smaller Alternative Investment Market (AIM).

You can declare as much as 30 per cent upfront earnings tax reduction on the sum you spend money on a brand new VCT (or new shares issued by an present VCT) and should hold the shares for at the least 5 years. The most funding per yr is £200,000.

So should you make investments £10,000 in a VCT, £3,000 could be taken off your earnings tax invoice. If you promote your VCT shares and make a revenue, the proceeds will not be accountable for capital features tax. Dividends are additionally tax-free.

EIS schemes are solely accessible for start-ups, however can maintain companies with as much as seven years of buying and selling and fewer than 250 staff. The dangerous nature of EIS means traders should search skilled recommendation when shopping for – or show they’re a ‘excessive internet price particular person’ or subtle investor.

You can make investments as much as £2million a yr in new shares in EIS-qualifying companies to profit from earnings tax reduction at 30 per cent of the sum invested. To retain this tax break, you should maintain the shares for at the least three years, ranging from the date of the funding or, if later, the date the EIS begins buying and selling. After three years, you may profit from capital features tax reduction on shares disposed of at a revenue.

You may additionally be capable of offset any losses on disposal of the shares, both towards capital features tax or, in some circumstances, towards earnings tax, internet of any earnings tax reduction. You can even defer an present capital features tax cost should you reinvest the achieve in EIS-qualifying shares. Unlike with VCTs, there is no such thing as a inheritance tax to pay on shares held for at the least two years.

How to begin investing

There are 18 or so VCT share gives open to new funding. VCTs have a restricted capability and one of the best gives refill quick. Jason Hollands, at funding platform Bestinvest, says: ‘Space is crammed up on a first-come, first-served foundation, so verify what’s open and the way a lot capability remains to be accessible.’

VCT and EIS schemes range wildly when it comes to what they spend money on; some spend money on personal corporations, others in AIM-listed shares – and a few deal with a selected sector. Research is required to seek out the one that most closely fits your targets.

Of the VCT gives open to spend money on, Hollands’ prime picks consists of the Pembroke VCT ‘B’ Shares, which invests in corporations together with the design agency Bella Freud, ice-cream maker Hackney Gelato and flower supply firm Floom. He additionally likes the 2 British Smaller Companies VCTs, Hargreave Hale AIM VCT, Foresight Enterprise VCT, the three Northern VCTs and the 2 Octopus AIM VCTs.

More info on VCTs is out there from the Association of Investment Companies at theaic.co.uk/vcts; The Wealth Club at wealthclub.co.uk; and Best Invest at bestinvest.co.uk/vcts/current-launches.