Both are high risk investments – but both have the potential of high reward…

Let’s start with some facts. A Venture Capital Trust (VCT) is an investment vehicle quoted on the stock market, like an investment trust. The VCT scheme is designed to encourage investment in smaller, normally higher risk companies, often including start-up companies.

The VCT therefore has to hold at least 70 per cent of its portfolio in these qualifying companies with a range of rules defining what is and isn’t a qualifying company. For example, no company it invests in can have gross assets in excess of £15m and none may comprise more than 15 per cent of the entire portfolio.

An Enterprise Investment Scheme (EIS) is an investment in a single unquoted, privately held company. With such an investment, there’s also an opportunity to participate in the running of the business – and to get paid for doing so.

Both investments come with substantial tax breaks. With a VCT, you can invest up to £200,000 per tax year in ordinary shares and qualify for 30 per cent income tax relief, provided you hold the shares for at least five years. There’s no CGT on disposal (but also no CGT relief on losses). Dividends are exempt from income tax.

With an EIS, you can invest up to £1,000,000 and receive 30 per cent income tax relief if you hold the investment for three years. Gains are CGT free, and you can defer CGT gains on other assets by investing them into an EIS. The charges on both VCTs and EIS are higher than on unit trusts and investment trusts.

So, which is better? For many of us, the answer would be “neither”. Both are high risk investments – due to the inherent fragility of start-up companies, in which both vehicles invest. According to the Times 100, one in three UK start-ups don’t last three years. The reasons are many: lack of experience, over-borrowing and under-capitalisation, poor business models, and so on. It’s possible to lose all your money invested in a VCT or an EIS.

However, this means that two-thirds of start-ups do survive: and some of these inevitably go on to become very successful.

So, while unsuitable for novice investors, more experienced and wealthier investors might want to consider these as part of their portfolio.

That being said, which is best? That will depend on your circumstances. However, the VCT spreads risk by investing in a number of companies, not just one like the EIS. Also, because VCTs are traded, you can sell them after five years (or earlier, if you’re prepared to forego the tax breaks). An EIS is highly illiquid, and usually the only way to realise your investment is through flotation.

As always, taking expert, independent financial advice is suggested before indulging in this form of investment. But if you’re happy to take on extra risk for the potential of greater gain, they might be worth considering.