EIS and VCT: A Tax-Efficient Venture Investing Guide

Important Notice: The terms, rules, and tax reliefs described in this article are based on current legislation and HMRC guidance but are subject to change. The value of tax benefits depends on individual circumstances. Investors should always consult a qualified independent financial adviser if unsure about suitability prior to investing.

Key Highlights

Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCTs) offer valuable tax incentives for clients investing in smaller UK companies. Both allow investors to claim 30% income tax relief, while EIS also provides the ability to defer capital gains tax and claim loss relief, and VCTs offer tax-free dividends and capital gains exemptions on exit (subject to conditions).

These schemes give clients exposure to high-growth, unlisted companies that are typically less correlated with the stock market. This creates opportunities to diversify a portfolio and tap into UK innovation, particularly appealing for clients looking beyond traditional pensions and ISAs.

That said, they carry significant risks. These are long-term, illiquid investments in small businesses. The entire investment may be lost, and both compliance and timing must be carefully managed. Still, when used appropriately, the benefits can outweigh the risks for eligible clients.

Note on upcoming changes: the November 2025 Budget saw increases in EIS/VCT investing thresholds – doubling the amount of EIS & VCT funds a company can raise each year and over its lifetime.

These changes are hugely welcome – they strengthen the proposition for EIS and VCT investors as they enable us to follow our successful investments with additional capital, and in doing so continue to support British growth champions as they scale.

The good news was tempered by the reduction in up-front VCT income tax relief from 30% to 20% from next tax year. The Chancellor should not be undermining her rhetoric on supporting growth with reducing incentives to invest in VCTs. The UK’s venture capital market is the third largest in the world with £9 billion invested in innovative UK companies last year. Venture Capital Trusts are a significant part of this success story – other European countries have tried and failed to match the success of EIS & VCT in driving investment into growth companies.

What is the Enterprise Investment Scheme?

The Enterprise Investment Scheme (EIS) was introduced in 1994 to stimulate investment into early-stage British companies. As it currently stands, investors commit capital to unlisted businesses that meet qualifying criteria, including (subject to exceptions and HMRC definitions):

Generally fewer than 250 employees (up to 500 for knowledge-intensive companies)
Gross assets of no more than £15 million before the investment
A permanent establishment in the UK
A lifetime cap on risk-finance investment of £12 million (or £20 million for knowledge-intensive companies)
Meeting the “risk-to-capital” condition
Being unquoted (AIM-listed companies are permitted)
Being engaged in a qualifying business (not property, mining, or investment activities for example)

In return, investors benefit from a range of tax reliefs:

Income tax relief: 30% income tax relief, claimable against income tax for the year of investment or carried back one tax year.
Capital gains deferral: capital gains tax liabilities can be deferred if the gain is reinvested into EIS-qualifying shares, postponing an immediate tax bill until the EIS qualifying shares are disposed of.
Exemption on disposal: gains realised on qualifying EIS investments are exempt from capital gains tax, provided the shares are held for at least three years from the later of the investment date or the company’s trade commencement date.
Loss relief: if the company fails, investors can offset some of the loss against their income or capital gains. For higher-rate taxpayers, this can mean recovering over 60% of a failed investment.
Business Relief: after two years, qualifying EIS shares may be eligible for Business Relief, meaning they can be passed on at the prevailing lower rate of inheritance tax, provided the company continues to meet the conditions.

However, there are strict holding requirements. Shares must be kept for at least three years to retain tax benefits. EIS investments in unquoted companies have no secondary market and exits usually depend on acquisitions or IPOs, which can take years or may never materialise. Investors need to manage documentation, particularly the EIS3 certificates required to claim relief.

What is a Venture Capital Trust?

Venture Capital Trusts (VCTs) were launched in 1995 and are publicly listed investment vehicles. By subscribing for new VCT shares, investors gain exposure to a professionally managed portfolio of early-stage businesses.

VCT investors receive 30% income tax relief on investments of up to £200,000 per tax year, provided shares are held for five years. The main appeal for many clients is the tax-free dividend stream, which is generated as companies in the portfolio mature and are exited. Any capital gains from selling VCT shares are also exempt from tax.

Although VCTs are traded on the London Stock Exchange, liquidity is typically low. Shares often trade at a discount to net asset value and may be difficult to sell without affecting price. In practice, VCTs should be viewed as long-term investments.

Another consideration is availability. Most VCTs only raise new funds during specific periods, often linked to the tax year. Offers can close early if fully subscribed, so advisers must monitor availability closely. Like EIS, the underlying companies are high risk and unquoted, and portfolio performance can be volatile.

VCTs do not qualify for Business Relief.

Why should you use these schemes in client portfolios?

Tax efficiency

Both schemes offer generous income tax relief, which improves the net return for clients. Investing £100,000 in either scheme could reduce a client’s tax bill by £30,000, effectively lowering the cost of investment. In the case of VCTs, tax-free dividends offer an attractive potential source of dividend income, especially for those in higher tax brackets.

Diversification and growth access

EIS and VCT portfolios typically include fast-growing businesses in sectors such as fintech, health tech, or clean energy, areas that are often underrepresented in traditional portfolios. These investments provide access to early-stage growth that would otherwise be difficult for retail investors to reach.

Origination also plays a key role. Not all EIS/VCT managers have access to the same deal flow. Strong origination capabilities, along with ongoing support to investee companies, can significantly affect performance. This is often a key differentiator between fund managers and should be part of any adviser’s due diligence process.

Low correlation with traditional assets

Since these investments are unquoted and depend on company-specific factors rather than broader market trends, they provide low correlation to public equities and bonds. Including a small allocation of EIS or VCT in a diversified portfolio may improve risk-adjusted returns.

Estate planning benefits

EIS investments may qualify for Business Relief at the prevailing inheritance tax rate (currently 50%) after a two-year holding period. This makes them a potentially useful estate planning tool, particularly for clients with taxable estates and a tolerance for higher investment risk.

Who are these investments suitable for?

These schemes are designed for clients who are comfortable with high-risk, long-term investments. Ideal candidates include:

High earners seeking additional tax relief beyond pensions and ISAs
Clients with significant one-off capital gains seeking to defer or mitigate tax
Retirees building tax-free income streams through dividends (from VCTs)
Individuals with large estates planning to mitigate inheritance tax

They are not appropriate for clients needing liquidity, those with low-income tax liabilities, or individuals unwilling or ill-suited to accept the risk of capital loss.

Strategic use cases for advisers

High-income tax planning: a senior executive with a significant bonus might be looking to reduce their tax bill and diversify their portfolio. Investing in a Venture Capital Trust provides immediate tax relief and long-term exposure to early-stage businesses, alongside potential tax-free dividend income.
Capital gains deferral: clients who realise a large capital gain, such as from a property sale, can use the Enterprise Investment Scheme to defer that gain and reduce their income tax bill. This is particularly helpful where the client does not need immediate liquidity and is open to long-term venture-style investment.
Rolling VCT strategy: by investing in a VCT each tax year, clients can build a ladder of potential tax-free dividend payments and regular income tax relief. After the five-year holding period, they may be able to sell earlier VCTs and reinvest into new offers, creating a rolling cycle of relief and income.
Inheritance tax planning: for older clients concerned with passing on wealth to future generations, the EIS can be used to reduce inheritance tax exposure. If held for two years and until death, qualifying EIS shares can be passed to beneficiaries at the prevailing lower rate of inheritance tax, while also delivering growth potential and other tax reliefs in life.

Market trends and outlook

Fundraising slowed in the 2023/24 tax year, with Enterprise Investment Scheme totals falling by 20% and Venture Capital Trusts raising 17% less than the year before. This reflects broader market uncertainty and rising interest rates. However, these headwinds also created opportunities, with entry valuations for underlying investments becoming more attractive.

A major positive development is the extension of both schemes by the UK government until at least April 2035. This long-term policy certainty gives advisers the confidence to incorporate these investments into ongoing client strategies.

The broader tax environment has also made these schemes more relevant. Reductions in capital gains exemptions, dividend allowances, and potential inheritance tax reform all make tax-advantaged investing more attractive.

Valuations in the venture space have moderated from pandemic-era highs. For example, software company revenue multiples have fallen from 13.5× to closer to 6.7× (SaaS Capital, 2025). While this has impacted the near-term performance of some portfolios, it also offers more sensible entry points for new investors.

Risks and considerations

Both schemes carry a real risk of capital loss. The businesses involved are often young and unproven. Liquidity is a major issue: EIS shares cannot easily be sold, and VCTs, though listed, may have limited buyers.

There are strict holding periods, three years for the Enterprise Investment Scheme and five years for Venture Capital Trusts. Selling early, if possible, usually means losing the associated tax reliefs. Clients must understand this and have sufficient liquidity elsewhere.

Changes in government policy or investor eligibility can affect the tax advantages. Both the investor and the company must continue to meet qualifying criteria. If a company loses its status, the investor may lose reliefs or be required to repay them.

From an adviser’s perspective, there is also an increased compliance burden. Documentation such as EIS3 certificates can be delayed, and suitability assessments must be clearly documented given the higher-risk nature of these investments.

Frequently asked questions

What’s the difference between EIS and VCT?

EIS involves direct investment in qualifying companies, with benefits such as capital gains deferral, loss relief, and inheritance tax relief. VCTs offer access to a diversified, managed portfolio through a listed fund, providing income tax relief and tax-free dividends. The minimum holding period is shorter for EIS (three years vs five), however in practice holding periods can be longer for EIS due to liquidity constraints. VCTs are more geared toward income and diversification.

Can clients use both EIS and VCT?

Yes. Some clients use the Enterprise Investment Scheme for capital gains deferral or estate planning, and a Venture Capital Trust for income. The two are complementary and often used together.

How much can a client invest?

The annual limit per tax year is £1 million for EIS (or £2 million if at least £1 million goes into knowledge-intensive companies), and £200,000 per annum for VCTs.

Are these schemes still viable post-2025?

Yes. The UK government has extended both the Enterprise Investment Scheme and Venture Capital Trust schemes to 2035, supporting long-term planning and adviser-led strategies.

Guinness EIS & Guinness VCT

At Guinness Ventures, we have backed over 200 growth-stage businesses across the UK, deploying more than £340 million into selected companies. Our focus is on Series A-ready (What is Series A?) businesses with strong management, proven product-market fit, and clear scaling potential. We adopt a selective approach, backing only a fraction of the companies we meet, and aim to build diversified portfolios across sectors where the UK leads globally, including software, consumer, health tech, and business services.

Recent market conditions have created more attractive entry points, particularly following post-COVID valuation resets. With the extension of EIS and VCT to 2035 and wider tax changes (CGT, Business Relief, and pension allowances), many clients are reassessing estate and tax planning. EIS and VCT remain powerful tools within that toolkit, and our approach is designed to help advisers and clients access their full potential.

Learn about Guinness EIS & Guinness VCT.

The value of this investment can fall as well as rise and you may not get back the amount you invested.

Reference list

SaaS Capital (2025) The SaaS Capital Index. Data as of: 31 August. Available at: https://www.saas-capital.com/the-saas-capital-index/ (Accessed: 30 September 2025).