EIS and VCTs are designed to encourage investment into early-stage UK businesses. Both were introduced by the John Major government in the mid-1990s (1994 for EIS and 1995 for VCTs) and they provide retail investors with access to portfolios of high-growth companies whilst offering generous tax incentives to compensate for the additional risk involved.

While they share a common purpose, the structure, risk profile, and tax treatment of each is meaningfully different.

VCTs are listed vehicles, typically holding a larger number of companies and offering greater liquidity. They are best known for paying tax-free dividends.

EIS investments, by contrast, are long-term and illiquid by design, with investors typically committing capital for seven to ten years. In return, EIS offers a broader and more flexible set of tax reliefs.

VCTs are generally considered lower risk than EIS, largely due to broader diversification and more mature underlying portfolios. They also benefit from attractive, though more limited, tax advantages.

Income tax relief

VCTs currently offer upfront income tax relief, though following recent announcements this relief is expected to reduce to 20% from April 2026. Unlike EIS, VCT relief cannot be carried back to a previous tax year.

Dividends and capital gains

Dividends paid by VCTs are tax-free, and gains on disposal are exempt from CGT. However, VCTs do not allow investors to defer capital gains realised elsewhere.

No loss relief

Unlike EIS, VCTs do not offer loss relief. While the risk of total loss may be lower at a portfolio level, individual company failures still result in a permanent loss of capital for that holding.

EIS is higher risk than VCTs, but this is reflected in the depth of tax relief available.

Income tax relief

Investors can claim 30% income tax relief on qualifying EIS investments. A £100,000 investment could therefore reduce an income tax bill by £30,000. Importantly, this relief can be claimed in the year of investment or carried back to the previous tax year, offering valuable planning flexibility.

Capital gains tax benefits

EIS offers two distinct CGT advantages. First, gains made elsewhere can be deferred by reinvesting into EIS-qualifying companies or funds. Second, any growth on qualifying EIS investments is free from CGT, provided the conditions are met.

Deferred CGT becomes payable when the EIS investment is disposed of, but the intention is that investment growth and tax relief offset this liability.

Inheritance tax

EIS shares will typically qualify for Business Relief after two years, meaning they can fall outside of an investor's estate for IHT purposes. This has become increasingly relevant in light of the upcoming changes to pension taxation expected from April 2027.

Loss relief

Loss relief is a key, and often underappreciated, feature of EIS. It's one from which managers should not shy away. While portfolios are diversified, investors should expect some businesses to fail. If a loss does occur, it can be offset against income or capital gains at the investor's marginal tax rate, significantly reducing the net downside.

Portfolio construction

Portfolio construction is also different with an EIS investment. Once you invest, whether via a fund or directly into a company, you yourself are an underlying shareholder in that business. In a VCT, as they are listed vehicles, you are a shareholder in the VCT itself, not the underlying companies.

The answer depends entirely on personal circumstances.

At Love Ventures, we often frame the decision as:

• Tax-free income → VCTs

• Tax-efficient growth and planning flexibility → EIS

VCTs offer greater liquidity, tax-free dividends and a more familiar investment structure.

EIS, while higher risk, is often more powerful from a tax-planning perspective. Carry-back relief, CGT deferral, loss relief and IHT advantages make it particularly compelling for investors managing complex or high marginal tax positions.

Both have a role to play, and for many investors, a combination of the two is appropriate.

If you're considering an investment for yourself or your clients, please get in touch with Olly Norman or Annabel Stanford in our Investor Relations team, who would be happy to discuss which option may be most suitable.