Breaking News - INVESTMENT EXTRA: Tax-free bonus by backing start-ups

As low interest rates prevail and the Government continues to claw back the annual allowance on pensions, investors have been forced to find more creative ways of getting returns.For many, investing in venture capital trusts (VCTs) or an enterprise investment scheme (EIS) could be the answer.VCTs and the EIS were introduced by the Government as a way of encouraging investment in start-up businesses in the UK. But they also come with a major tax relief, making them an attractive option for serious and experienced investors. The biggest draw for putting money into VCTs and the EIS is the 30 per cent relief on investments of up to £200,000 per person, meaning a £10,000 investment would cost an individual just £7,000. Additional benefits include tax-free dividends and tax-free capital gains on VCTs, and inheritance tax relief on enterprise investment schemes.Although VCTs and the EIS are high-risk, the tax breaks help to mitigate some of that, as well as the fact that all companies are required to go through HMRC.This means the taxman essentially carries out a ‘health check’ on the companies, says Mark Brownridge, director general for the EIS Association.Existing investors will have their eyes on the Budget on Wednesday, with the industry expecting some technical changes to the schemes.Since the EIS’s launch in 1994, 26,355 companies have received investment, with £16.2bn of funds raised. VCTs, which were introduced in 1995, have seen £7bn worth of funds raised, and last financial year issued shares to the tune of £570m – the highest amount raised since 2005/6. EIS success stories include smoothie company Innocent and English wine maker Chapel Down.Bosses at members-only luxury travel company Secret Escapes put part of their success down to the investment secured through the VCT scheme.Launched in 2010, the firm now has offices in London, Berlin, Munich, Stockholm, Warsaw, New York and San Francisco, has more than 1.3m customers around the world and reported turnover of £83.5m last year.But with such investments also comes a high risk of failure. DVD mail order service provider Love Film, which closed its operations last month, is one such name to have enjoyed initial success from VCT funding but failed to maintain its momentum.But there are concerns that investors are not putting their money into the higher risk, long-term sectors that the Government intended, and instead focusing on companies which have high ‘asset backing’ to hedge the risk.Jonathan Bell, chief investment officer at Stanhope Capital, says: ‘There are some “capital preservation” investments with high-asset backing that also qualify for the same tax breaks while not offering the same benefits to the economy. It is these schemes that the Chancellor will target.’VCTs are viewed as the safer option for retail investors as they work in a similar fashion to an investment trust, by allowing them to spread their risk over a number of companies in the long term – for a minimum of five years. To qualify for tax relief under EIS, investors must have held their shares for a minimum of three years.Companies in VCTs also have a few years on their EIS counterparts, up to ten in some cases, and can include small unquoted businesses, firms in specialist sectors or companies listed on the smaller indices of the London Stock Exchange such as AIM.However, as VCTs and EIS are highly illiquid assets, Jason Hollands, managing director of business development at Tilney, stresses the importance o1