Could EIS or VCT reliefs work for you?

When it comes to raising funds for early-stage businesses, it’s easy to feel like the odds are against you. Investors want returns, founders need capital, and both sides are trying to manage risk while chasing growth. 

That’s where enterprise investment schemes (EIS) and venture capital trusts (VCT) come into play. These are two government-backed schemes designed to uncover investment for startups by offering tax incentives to people willing to back them.

But here’s the catch: these schemes are packed with conditions. Generous, yes. Straightforward, not always. So, it’s important to first understand how they work, who they’re for, and how to get them right.

What are EIS and VCT reliefs?

Both are aimed at encouraging private investment into high-risk, early-stage companies in the UK. They do this by offering tax reliefs that make investing more attractive, so young companies can raise capital.

The EIS allows individuals to invest directly in qualifying UK companies. In return, they can claim income tax relief of up to 30% on investments up to £1m each year, or up to £2m if at least half is invested in knowledge-intensive companies.

There are capital gains tax (CGT) exemptions if shares are held for at least three years, and loss relief is also available if the investment doesn’t work out. Investors can defer CGT on other gains by reinvesting through EIS.

VCTs work slightly differently. Rather than investing directly in a business, individuals buy shares in a listed fund that spreads investment across several early-stage companies. The tax benefits are similar, but shares must be held for at least five years.

There’s no loss relief or CGT deferral under the VCT route, but the broader investment spread appeals to those looking for a less hands-on approach.

In short, EIS is often suited to investors looking for direct involvement in a specific business, while VCTs offer a managed, portfolio-style option.

Who qualifies, and what do you need?

To access EIS funding, a company must be unquoted (not listed on a recognised stock exchange with the exception of AIM), have fewer than 250 full-time employees, and have gross assets below £15m before investment. Funding is capped at £5m per year and a lifetime limit of £12m across all venture capital schemes. If the business qualifies as being ‘knowledge intensive,’ the maximum number of full-time employees raises to 500, the annual funding cap rises to £10m and the lifetime limit raises to £20m. The business must also show that funds are being used to support growth and development.

Securing Advance Assurance from HMRC (i.e. a  written opinion from HMRC that your company is likely to qualify, gives investors confidence and often makes fundraising easier.

VCT qualification follows a similar company profile but works differently in practice. Companies don’t apply directly. Instead, fund managers select businesses that fit their investment strategy, carry out due diligence, and make the investment on behalf of the trust. If successful, your company receives funding while investors claim tax relief via their VCT shares.

Key considerations of the schemes

Despite their benefits, EIS and VCT applications can be derailed by small missteps. Some of the most common issues include issuing the wrong structure of shares (namely shares with preferential rights), spending funds outside the permitted purpose or, or engaging in non-qualifying activities like the leasing of assets, land/property development or financial services.

It’s not just about qualifying; it’s about showing that you understand the responsibilities that come with these schemes. Keeping the right records, meeting deadlines, and issuing certificates correctly, these details matter more than you might think.

Miss one step, and investors could lose their relief. This can have a knock-on effect that affects your ability to have future funding rounds, too.

Why it matters for growth

For startups aiming to scale, EIS can be a powerful part of the funding mix. It signals to investors that you’re serious and future-focused. It also opens the door to individuals who might otherwise steer clear of high-risk ventures.

With VCTs, there’s a chance to benefit from institutional-style backing, gaining access not just to capital, but also experience, networks and credibility.

These schemes are about more than tax relief. They’re tools to build trust and give early-stage businesses a stronger foundation for growth.

EIS vs VCT scheme- which is right for you?

There’s not one answer here. If you’re an investor looking for direct involvement in a specific startup and you’re comfortable with the associated risk, EIS might be a better fit. If you prefer spreading your investment across a number of ventures with a managed approach, VCTs offer that balance.

For founders, EIS is often the more straightforward path, particularly in the early stages when you’re raising your first rounds. As your funding strategy evolves, VCTs could become part of the longer-term plan.

At AAB, we work with fast-growing businesses and investors to simplify the complex. If you’re ready to explore what EIS or VCT could mean for your next step, our team can guide you through the process. If you have any questions, please do not hesitate to get in contact with Liam Hosie, or your usual AAB contact.