What’s the most tax-efficient investment? ISA? EIS? VCT? SEIS? Or even DIY?

What’s the most tax-efficient investment? ISA? EIS? VCT? SEIS? Or even DIY?

Fri 07 Mar 2014

The amounts that can be saved through pensions are being restricted and many savers already use their full ISA allowances. So taxpayers are looking for other tax-efficient savings options.  Should they take one of the structured retail products available or look at DIY investment alternatives?

Many taxpayers are currently affected by the reduced pensions lifetime allowance (LTA)  which restricts the scope for pension savings and is about to reduce further, from £1.5m to £1.25m.  Many more will be affected in the future.  If you put as much money into your pension as possible and use your ISA allowance each year, what are the next things you should think about as a way of saving as tax efficiently as possible?

In principle investment into Venture Capital Trusts (VCTs) or Enterprise Investment Scheme (EIS) investments provide the best chance for creating savings value in a tax-efficient way.  Both schemes are designed to encourage UK savers to invest in unquoted companies, a sector which has more risk and volatility than most, but with the increased risks being compensated for by a suite of tax breaks. 

You can get 30% income tax relief when you put up to £200,000 into VCTs with a fund manager who will invest in a portfolio of unquoted companies , plus tax free dividends and, if you hold them for 5 years, tax free gains too. 

With EIS you can invest up to £1m and get a 30% income tax credit, capital gains rollover reliefs, and tax free gains on the EIS shares themselves after 3 years. 

If you make losses on the investment there are further CGT and income tax reliefs.  Seed Enterprise Investment Scheme (SEIS) which is the smaller company version of EIS, gives an even more attractive range of reliefs but with lower limits and for smaller and newer companies.

Given the range of tax reliefs on these investments the real return you can make is a lot greater than on a regular investment.  If you put in £100,000 and get an immediate £30,000 back that is an instant 30% return on your investment simply from HMRC.  However on the downside you are locked in to the investment for a 3 or 5 year period to retain this return and, therefore, locked in to management charges from the fund managers also.  If you pick the wrong investment these costs will certainly erode the benefit of the tax reliefs you get. 

What you will make in the end will depend on, firstly, the underlying performance of the investment during that period and, secondly, the total charges (usually a mixture of initial charges, management fees and performance fees) of fund managers.
For your structured investment in these volatile and complex areas to succeed, therefore, you need good advice on the investment itself, and in particular, on the record of the management group, together with advice on the fee structure of the investment and how this compares to normal market levels.  However, with EIS and SEIS there is an alternative which might suit at least some active investors more than investing through a structured retail investment.

Whilst VCTs are quoted investments and so can only be made through a provider within the structured VCT framework, EIS and SEIS investments can be made by individuals investing directly into companies.  If, for example, you become a member of one of the many Angel Investor networks in the UK you could take a minority investment in a company (up to 30%) and secure the EIS or SEIS investment tax reliefs directly without investment managers being involved.  You could also – for example – become a non executive director of the company you are investing in.  This will certainly reduce the costs of the investment and many experienced businessmen, who have perhaps built their own business and would prefer to be actively engaged in any investments they make, should think of this as a very plausible alternative to the structured retail offerings.

Whatever approach you take – and active investment will not suit everyone – Mazars will be able to assist.  Its Regulated Investment Company, Mazars Financial Planning Ltd, will be able to help you find the right retail investment – whether that is a VCT or EIS type investment.  If your preference on the other hand is for active investment, our tax business will be able to help you secure EIS or SEIS type reliefs on a direct investment into a company.

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