05: Risk and liquidity

The very small size of the companies involved in EIS and VCT investment means that these schemes are high risk investments and, for most investors, should form only a small part of their overall investment portfolio.

Liquidity for EIS investments is usually very limited. Even if an EIS company is listed on AIM or PLUS (the new name for OFEX), trading is likely to be minimal. In theory, VCTs should be more liquid, as they are generally larger and listed on the main stock exchange. In practice, many VCT issues suffer from poor liquidity. As a result, some VCTs operate share buyback schemes to enable disinvestment, albeit usually at a discount to the underlying asset value.

Investment in both EIS and VCT should be regarded as long term. The timescale needed to avoid clawback of income tax relief should not be regarded as the investment’s natural term.