Investment Wrappers (ISA, EIS & VCT) in UK Wealth Planning

Investment Savings Accounts

Individual Savings Accounts (ISAs ) were first set up by the UK government in 1999 and have been one of the main vehicles for tax-efficient saving and investing. ISAs allows individuals to hold shares, cash and trusts free of tax on dividends, capital gains in relation to gains made on disposal of assets such as shares or interest. With regards to regulation, firms that offer ISAs must be approved by HMRC, who set detailed rules applicable to ISAs. Main rules are only one ISA per person per tax year and an investment limit of £20,000 per person per year. ISAs are aimed primarily at lower affluent segments for clients rather than HNWIs or UHNWIs.

Venture Capital Trusts (VCTs)

VCTs provide venture capital for small expanding companies and also  income in the form of dividend distributions and capital gains for investors. VCTs were introduced in the Finance Act 1995 and were designed to encourage investment into new UK businesses. For gaining tax benefits, investors have to invest in higher risk newer firms. Similar to ISAs, VCTs are regulated by the HMRC and businesses need to be qualified under their rules. VCTs include income tax relief at the rate of 30% on the amount subscribed for. Each individual’s investment is capped at £200,000/year. When VCTs are held for at least 5 years, a capital gains tax deferral is also available. VCTs are aimed at more wealthy clients due to their riskier nature.

Enterprise Investment Schemes (EIS)

Enterprise Investment Scheme (EIS) are a series of UK tax relief schemes launched in 1994. EIS encourages investment into small unquoted companies. Akin to VCTs, they are conditional upon the company investment being a qualifying business under the scheme by the HMRC. The main distinction to VCT is that the EIS does not form part of the estate for inheritance tax purposes and is exempt from this tax subject to HMRC rules. Hence they are very attractive to clients with large estates looking to avoid large inheritance tax liabilities arising on their death, additionally clients can also benefit from a 30% upfront income tax relief, as well as enjoying Capital gains tax (CGT) deferral if the sale proceeds are reinvested on another qualifying EIS. The maximum investment per person  under EIS is currently £1,000,000/year. EIS can yield a maximum reduction in tax liability of £300,000 ( 30% rate), through a direct rebate from HMRC.