Tax planning: Another world of tax-efficient investments

Click to follow
The Independent Online
There is a world of tax-efficient share investment beyond PEPs. Higher-rate taxpayers who are willing to take more risks with their money may be interested in venture capital trusts (VCTs) or enterprise investment schemes (EIS). Both are aimed at boosting smaller companies and give you the chance to get in at the beginning of what could be a business success story.

In return you get generous tax breaks, useful for anyone who has large capital gains liabilities on their stock market portfolio. With the market so high, you can defer your tax bill by investing in VCTs and EIS. Both schemes also offer income tax relief at 20 per cent on everything you invest, plus the chance to take a tax-free income or grow the cash tax free.

A VCT works like a specialist investment trust. It raises capital from investors during a launch period, and then uses that to buy shares in small and unquoted companies. Under present rules, a VCT must invest 70 per cent of its money in unquoted companies or in alternative investment market (AIM) shares. The rest can go into very safe investments, including government bonds (gilts) or blue chip shares in big UK companies, thereby spreading investors' risks.

This is the peak time of year for new VCT issues, and the best tax breaks go to people who buy shares at launch. Current offers include Quester VCT II, a successful trust raising extra capital; and a BWD specialist AIM fund - this type of VCT is generally less risky, as firms listed on AIM already have a track record. The BWD fund also has a selection of blue-chip shares in the portfolio. If you are interested in investing in a VCT, you normally need at least pounds 2,000. And it's important to get a clear idea of schemes first. The David Aaron Partnership of financial advisers has a guide, with risk ratings (see below).

An enterprise investment scheme (EIS) has similar tax breaks, but raises money to invest in the shares of one company, including those quoted on AIM. An EIS is also a good way to spot an entrepreneurial idea which could make you a lot of money.

Current share offers which expect to get the go-ahead as EIS schemes, include The Childcare Corporation, which believes the market for professional child care will grow by 50 per cent by 2002. Minimum subscription is pounds 2,000. The Money Channel, led by Adam Faith and stockbroker Paul Killik, hopes to raise pounds 6.5m to fund a personal finance and investment TV channel. Minimum investment, pounds 1,395.

n Prospectuses: The Childcare Corporation 0171-426 9079; Money Channel 0171-761 4576.

n The David Aaron VCT guide costs pounds 2. Write (before 13 March) with a cheque payable to David Aaron Partnership, Shelton House, High Street, Woburn Sands, Milton Keynes MK17 8SD.