What is the difference between VCT and EIS tax relief?

Full answer

Venture Capital Trusts (VCTs) and the Enterprise Investment Scheme (EIS) both encourage investment into smaller, higher-risk UK companies by offering 30% upfront Income Tax relief, but the structure and the full package of reliefs differ significantly. **How VCTs work** A VCT is a listed company (traded like a share on the stock exchange) that pools investors' money and spreads it across a portfolio of typically 20-70 small, unlisted or AIM-listed trading companies. You buy shares in the VCT itself, get 30% Income Tax relief on investments up to £200,000 a year provided you hold for at least five years, and dividends paid out by the VCT are entirely tax-free with no limit. Gains on selling VCT shares are also exempt from Capital Gains Tax. **How EIS works** EIS relief is claimed on a direct investment into a single qualifying company's new shares (up to £1 million a year, or £2 million if some goes into "knowledge-intensive" companies). You get the same 30% Income Tax relief, but must hold for at least three years. EIS also offers loss relief -- if the company fails, you can offset the loss against your income (not just capital gains), CGT deferral relief (rolling a gain from another asset into the EIS investment to defer the tax), and EIS shares qualify for Business Relief after two years, making them exempt from Inheritance Tax. **Risk and diversification** VCTs spread risk across many companies within one investment, which suits investors wanting exposure to the venture space without picking individual companies. EIS concentrates risk in a single company (unless you build a portfolio of several EIS investments yourself), so due diligence on each individual business matters much more. **Dividends vs growth** VCTs are often chosen partly for their tax-free dividend income, since many VCTs distribute a meaningful yield each year. EIS investments rarely pay dividends -- the return, if any, usually comes from capital growth on exit, which is also more tax-advantaged for EIS via the additional reliefs. **Which suits which investor** Higher earners wanting IHT planning alongside upfront relief often lean towards EIS given the Business Relief angle, while investors wanting a more diversified, income-generating vehicle with a shorter three-year lock-in versus five typically prefer... actually VCTs require the LONGER five-year hold versus EIS's three years, so investors wanting to access capital sooner may prefer EIS. Both are high-risk and relief can be clawed back if conditions are not met. **Practical tip** Use EIS loss relief and IHT Business Relief calculations alongside the 30% upfront relief when comparing net-of-tax risk, and always check a company or trust's HMRC advance assurance status before investing in either scheme.

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More answers

• What income tax relief does the Enterprise Investment Scheme give in 2026/27?
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