The Good, The Bad And The Ugly Of VCTs And EISs

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The Good, The Bad And The Ugly Of VCTs And EISs

The Good, The Bad And The Ugly Of VCTs And EISs by SensibleInvesting.TV

“There’s some serious wealth destruction there that at worst could have left you with less than 20p in the pound. You’d have more fun setting fire to £50 notes.” – Monevator – ‘The Investor’ on VCTs

Is the tax tail of VCT and EIS investment wagging the investment dog?

When it comes to considering the role of Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EISs), this is the question that needs to be asked and answered. Tax breaks need to be very carefully weighed against the material risks of owning minority stakes in small, unquoted company investments. Are they ever appropriate for investors?

VCTs and EISs represent tax-advantaged opportunities to invest equity capital into very small and often very early stage – or even start-up – privately held businesses. The words ‘equity’, ‘privately held’, ‘small’ and ‘early stage’ immediately point out some of the risks, which we cover in more detail later. There is a certain human appeal towards potentially investing in the next Google or similar tech start-up, or owning a share of a biotech firm commercialising some aspect of research for the good of mankind. Intuitively, one knows that this is a risky, dice-rolling business and that for every winner there are bound to be some losers and some also-rans. But the tax breaks afforded by HM Government, for both of these schemes, risk clouding the due diligence that these investments deserve.

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