If you want to diversify your investments and improve tax efficiency, you may wish to consider Enterprise Investment Schemes (EIS) or Venture Capital Trusts (VCTs). These investments can offer generous tax reliefs, but they are high risk and are only suitable if you are comfortable committing capital for the long term.
What are EIS and VCTs?
EIS and VCTs both involve investing in small, unquoted trading companies that are raising capital in their early stages. The government encourages these investments because they support innovation, job creation and economic growth. For investors, they can also provide diversification, as returns tend to have a low correlation with mainstream assets such as pensions and Individual Savings Accounts (ISAs).
What tax benefits are available?
EIS and VCTs have been available since the 1990s and are widely used by investors who want to invest tax-efficiently, particularly where pension allowances are close to being exhausted.
Currently, both schemes offer income tax relief of up to 30 percent. For example, a £100,000 investment could reduce your income tax bill by up to £30,000, subject to eligibility.
To keep this relief:
- EIS investments must be held for at least three years
- VCT investments must be held for at least five years
In the 2025 Autumn Budget, the government confirmed that VCT income tax relief will reduce from 30 percent to 20 percent from April 2026.
EIS investments may also offer:
- Capital gains tax deferral, allowing gains from other assets to be reinvested and the tax deferred until disposal
- Inheritance tax planning benefits, as EIS-qualifying shares may qualify for Business Property Relief after two years, provided they are still held at death
VCTs do not qualify for Business Property Relief, as investors hold shares in the trust rather than the underlying companies.
Key differences between EIS and VCTs
EIS usually involves investing directly into individual companies. This can increase potential returns but also concentrates risk.
VCTs are listed investment companies that spread risk across a portfolio of smaller businesses, making them more diversified and easier to access.
For the 2025 to 2026 tax year:
EIS
- Up to £1 million per year qualifies for income tax relief
- Increased to £2 million if at least £1 million is invested in knowledge-intensive companies
- Investments can be carried back to the previous tax year
- Dividends are taxable
VCT
- Up to £200,000 per year qualifies for income tax relief
- No carry-back to previous tax years
- Dividends are free of income tax
What are the risks?
EIS and VCTs invest in small, early-stage companies and carry a high risk of failure. They are also illiquid and can be difficult to sell, meaning your capital may be tied up for several years. For most investors, these investments should form only a modest part of a well-diversified portfolio.
Business Property Relief cap
Business Property Relief (BPR) allows qualifying business assets to fall outside an estate for inheritance tax purposes once held for at least two years and still owned at death.
Following changes announced in the 2025 Autumn Budget, the value of assets qualifying for full BPR is capped at £2.5 million per individual.
- Up to £2.5 million continues to qualify for 100 percent relief
- Value above this cap benefits from 50 percent relief
This means assets above the cap are effectively taxed at 20 percent rather than the standard 40 percent inheritance tax rate, assuming no other reliefs apply.
Spousal transfer allowance
The £2.5 million BPR cap applies per individual and can be transferred between spouses or civil partners. If qualifying assets pass to a surviving spouse or civil partner, any unused portion of the cap can usually be carried forward. This means couples may be able to benefit from up to £5 million of assets qualifying for full relief on second death, subject to the rules in force at the time.
Planning considerations
When using EIS or other BPR-qualifying investments, it is important to remember that:
- Assets must still qualify at death
- Tax rules may change
- These investments carry higher risk and are not suitable for everyone
For larger estates, careful planning is needed to balance BPR-qualifying investments with other inheritance tax solutions, such as pensions, trusts and lifetime gifting.
Professional advice is essential to ensure any strategy remains appropriate and up to date.
Considering EIS or VCT investments?
EIS and VCTs remain among the limited tax-efficient investment options available to higher-net-worth individuals.
If you would like help assessing whether these investments are right for you, our independent financial advisers can provide clear, tailored advice as part of your wider financial and estate planning.
Important information
Don’t invest unless you’re prepared to lose all the money you invest. This is a high‑risk investment, and you are unlikely to be protected if something goes wrong – two-minute read IMPORTANT information about key risks.
Tax rules can change, and tax benefits depend on individual circumstances. The value of investments can go down as well as up and you may not get back the amount you invested. The past is not a guide to future performance and past performance may not necessarily be repeated.
This material is intended to be for information purposes only and is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Some information quoted was obtained from external sources we consider to be reliable.
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