VCTs and/ EISs

TheTracker

One way of trickling this sort of money into EIS is through crowdfunding platforms like Seedrs (I've invested 5 figures there). But in my opinion, the opportunities listed on such platforms may be higher risk than 'traditional' EIS/VCT routes. I'd reiterate that you wouldn't want to look at VCT/EIS unless you've maxed out SIPP inc carry back and ISA or have a tax exposed lump of income this year.

bowlhead99

Alphamare wrote: »

It's worth it to do for the tax benefits.

Where something carries large amounts of risk, I would be careful to say it's worth it just because of the tax benefits.

I would say the way to you should look at it that it's worth it for the total return, which, incidentally, includes tax benefits.

Yes, the total return includes tax benefits. But if you need the money back for some sort of emergency or change of plans in the first 5 years, you have to give back the income tax relief. And if the VCT winds up having only returned 20% of its initial NAV, the tax relief means you only lost 50/70ths of your money instead of 80/100ths, but that's still over 70% of what you put in.

I can see that it's easy for some people to be blinded by the size of the tax relief on offer and think that they don't want to miss out and so they must go and buy some of whatever it is that offers tax relief. That is a backwards way of looking at it - like 'the tail wagging the dog'. The tax relief only exists to compensate you for the risks of doing the VCT or EIS. If you invest in them you may lose your money so they give you tax relief as a sweetener / incentive. So the tax relief is needed because you invested in VCT. If you didn't invest in VCT you didn't need it.

So someone who doesn't have any VCT should not go "right, I can see there's some tax relief over there which I could grab, how do I get that, ah, it means I'll have to go and buy a VCT and keep it for half a decade or more - which I don't know much about and I can only afford one of them this year so my risks are highly concentrated in that one fund, but hopefully it'll be OK".

The way you should look at it is, "I already have a large portfolio of pension and ISA assets but I am now ready to further diversify my investments to include early-stage young companies, of which half will probably fail. If I do so, I'll be exposed to high fees and the eventual returns are uncertain, and my investment will be pretty illiquid, but the returns will be improved by some tax relief (as long as I keep it for long enough) to compensate me for the fact that half or more will fail. Is the tax relief enough compensation to take on that risk? If it is, I'll invest".

So to me it's all about what you are going to be investing in and whether the tax relief is enough. It shouldn't be that it's all about lowering your income tax so what do you have to invest in to do that.

For example, I could get 40% tax relief by giving to charity. One mindset would be "I have a big tax bill which I want to reduce to avoid giving HMRC my cash; this will be worth it for the tax relief, it will knock money off my tax bill." But after making the donation, it is the charity that ends up with the money, so you only have a small amount of tax relief paid into your bank account instead of all your original net salary, and now you can't afford all those other things you wanted.

A better way of looking at it is, "I definitely want to give £10k to this charity and not spend it on all those other things I wanted"; secondary consideration: "ah that's nice, there is some tax relief available so actually it cost me a bit less overall and I can afford a few of those other things I'd like after all."

I'm probably making too much of a meal of this explanation, but basically think of the tax relief as a pleasant side effect of something you were going to do anyway (making high risk investments in early stage companies). Rather than chasing tax relief as an end in itself, by making high risk investments in early stage companies.

TheTracker wrote: »

One way of trickling this sort of money into EIS is through crowdfunding platforms like Seedrs (I've invested 5 figures there). But in my opinion, the opportunities listed on such platforms may be higher risk than 'traditional' EIS/VCT routes. I'd reiterate that you wouldn't want to look at VCT/EIS unless you've maxed out SIPP inc carry back and ISA or have a tax exposed lump of income this year.

Makes sense, though as an example I did make some VCT investments last year (having not made any for a while) and might do again this year - without fully maxing my pension - because although the pension tax relief is higher I can't get the pension monies for at least 15-20 years while I could get the VCT monies in say 10-15; the overall 'alternative assets' allocation is not massive so I'm comfortable with my asset mix.

But VCT/EIS is definitely something you should be doing once you already have a decent amount of other more 'mainstream' investments.

Alphamare

Thank you bowlhead

This is basically my thinking. We are diversifying our portfolio a and this is part of that, it's an agressive part but we will only be putting in smallish amounts initially and only what we won't need access to.

We have the right amount of accessible cash it's actually about 12 months living expenses worth instead of the usual six (mostly in high interest current accounts)

We don't really want to keep adding our money into pensions, which we are putting about 20/25% salary into already and into our stocks and shares isas

I don't pretend to be any kind of an expert though but I have been spending a lot of time here. As hubby is self employed the tax rebate for money we were going to lock away is attractive. There is always the risk that it's lost but that's why we diversify.