Taking your first steps into private investment can feel a little daunting – but then you are dabbling in a very risky business (sometimes literally).
Because private investment plays such a vital role in getting new businesses off the ground, or aiding and abetting existing ones when pursuing new ventures, some companies qualify for a particular scheme or tax break, like VCT or EIS. The benefit a flourishing business can bring to the national economy is limitless, so the government helps to offset risks by providing investors with a helping hand in order to encourage investment.
Before you can decide which option is best for you though, you need to understand the incentives and their differences. Here’s a quick run-down of both VCT and EIS
VCT (Venture Capital Trust) is a British closed-end collective investment scheme. VCT is a type of publicly traded private equity, meaning that it is equivalent to an investment firm which is publically listed on the stock exchange.
A VCT can usually be placed into one of three camps: limited life, specialist and generalist. This gives an idea of the sort of companies that the fund is interested in investing in. VCTs are renowned for being particularly tax efficient, which is obviously something that any aspiring investor must take into account before parting with any funds.
An EIS (Enterprise Investment Scheme) is a tax relief project originally launched in the mid-1990s and designed to encourage investments in small, unquoted companies. Because investing in a company that isn’t listed on the stock exchange represents something of a risk, the tax relief is intended to provide some compensation for that.
Which should I use?
Both VCT and EIS are advantageous to both investor and investee, but that doesn’t mean that either are right for you or your investment plans. This requires careful consideration and only you can decide which the best option for you is.
This BBC News article outlines the risks and rewards associated with VCTs but you’ll also want to seek the help of a trusted advisor to help you navigate the difficult world of risk and reward.
Places like CSS partners can provide a comprehensive screening, evaluation and company monitoring service designed to further mitigate any investment risk and ensure that you are divesting your equity into a profitable venture. Investments are made individually, rather than through a fund, so that clients can make an independent call on each individual investment possibility. This can help you work out whether VCT or EIS schemes are best for you and thus choose your investments more wisely.