EIS vs VCT: Tax Relief, Investment Risks and Inheritance Tax Planning

Tax Queen

Tax Expert @ Pie

5 min read

Let’s Break This Down Together...

If you’re looking at tax-efficient investments, you may have come across the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs).

Both schemes are designed to encourage investment into qualifying smaller companies, but they work in different ways and come with different tax rules, investment risks and liquidity considerations.

There is also growing interest in how EIS investments may fit into wider inheritance tax planning. While an EIS investment is not the same thing as inheritance tax insurance, certain qualifying EIS investments may potentially benefit from Business Relief, subject to detailed conditions.

So, how do EIS and VCTs compare, and what should you understand before investing?

Let’s break it down.

Introduction to Tax-Efficient Investments

Tax-efficient investing can be useful when you’re looking beyond a standard savings account or investment portfolio.

The EIS and VCT schemes offer tax incentives in exchange for investing in qualifying businesses. However, the tax advantages come alongside investment risk. These investments are generally aimed at investors who can accept a higher level of risk and understand that tax relief should not be the only reason for investing.

The rules have also changed for VCTs. From 6 April 2026, the upfront VCT Income Tax relief rate fell from 30% to 20%. EIS Income Tax relief remains at 30% for qualifying investments.

That makes it particularly important to understand the differences between the two schemes before making an investment decision.

What Are EIS and VCT Schemes?

The Enterprise Investment Scheme (EIS) provides tax incentives for individuals who invest in qualifying smaller companies.

An eligible EIS investment can provide upfront Income Tax relief of 30% of the qualifying investment, subject to the relevant limits and conditions. EIS can also offer other potential tax advantages, including Capital Gains Tax benefits and loss relief.

EIS investments are generally made into individual qualifying companies. This can mean greater exposure to the performance of a particular business, so the investment risk can be significant.

Venture Capital Trusts, meanwhile, are investment companies that invest in a portfolio of qualifying smaller businesses.

Rather than investing directly in individual companies through an EIS, you invest in shares in the VCT itself. This can provide exposure to a portfolio of investments, although the value of the VCT shares can still rise or fall.

For qualifying VCT shares issued from 6 April 2026, the upfront Income Tax relief is 20%, subject to the qualifying conditions and relevant limits.

You can find more detail in our guide to Schemes and our guide to tax reliefs.

EIS vs VCT: Key Tax Differences

The biggest difference between EIS and VCTs is how the investments are structured and how their tax benefits work.

EIS Income Tax Relief

For qualifying EIS investments, you can generally claim Income Tax relief at 30% of the amount invested, subject to the relevant annual investment limits and eligibility requirements.

EIS also has a carry-back facility, which can allow qualifying investments to be treated as though they were made in the previous tax year, subject to the applicable rules.

VCT Income Tax Relief

For VCT shares issued from 6 April 2026, the Income Tax relief rate is 20% rather than the previous 30%. The relief is available subject to the qualifying conditions and the amount of Income Tax you have to pay.

This change is one of the most important updates for anyone comparing EIS and VCT investments in 2026.

Capital Gains Tax

EIS and VCTs can both provide Capital Gains Tax advantages, but the rules work differently.

Qualifying EIS shares can benefit from Capital Gains Tax exemption on disposal where the relevant conditions have been met and the EIS Income Tax relief has not been withdrawn.

EIS can also be used in certain circumstances to defer a Capital Gain by investing in qualifying EIS shares.

Qualifying VCT shares are generally exempt from Capital Gains Tax when you dispose of them. Importantly, the 5-year period associated with VCTs relates to retaining the upfront Income Tax relief; it is not a general 5-year minimum holding period for the Capital Gains Tax exemption.

Dividends

VCT dividends can generally be paid free of Income Tax where the relevant conditions are met.

Dividends received from EIS investments are generally subject to the normal dividend tax rules.

This difference can be relevant when considering the overall tax treatment of each type of investment rather than looking only at the upfront tax relief.

Final Thoughts

EIS and VCT investments can both offer tax advantages, but they are structured differently and involve different considerations.

EIS currently offers 30% upfront Income Tax relief for qualifying investments, while the VCT rate for qualifying shares issued from 6 April 2026 is 20%. EIS can also offer potential Capital Gains Tax and loss-relief advantages, while VCTs can provide tax-free dividends and Capital Gains Tax-free disposals when the relevant conditions are met.

For investors considering inheritance tax planning, qualifying EIS investments may also be relevant because some business property can qualify for Business Relief. However, this is not the same as inheritance tax insurance, and the rules changed from 6 April 2026.

The right approach depends on your investment objectives, risk tolerance, tax position, liquidity needs and wider financial circumstances.

Pie Tax: Simplifying EIS vs VCT Tax

Understanding tax-efficient investments is one thing. Keeping track of the tax information that goes with them is another.

Pie Tax helps you organise your personal tax information and keep track of the details you need when dealing with your Self Assessment.

If you invest through EIS, keeping your investment information, tax relief details and supporting documents organised can make your tax reporting easier to manage.

Quick and Easy Guide to Adding EIS Tax Relief in the Pie App

If you have made a qualifying EIS investment, make sure you keep the relevant documentation and tax relief information available when preparing your Self Assessment.

The amount of relief you can claim depends on the investment and your individual circumstances, so it is important to use the information provided with your EIS investment and follow the relevant HMRC rules.

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