Helping clients maximise tax-efficiency in a new landscape

When it comes to Government intervention shaping changes in financial services it is often a case of ‘slowly, slowly, catchy monkey’ with regulatory developments and political intervention often taking many years to work their way through the system and deliver an end result.

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Andrew Aldridge | Deepbridge Capital
24th January 2019
Andrew Aldridge Deepbridge Capital
" Those EIS that are currently open – and will open in the future – are now much more in keeping with how the sector was originally envisaged"

However, for those of us working in the tax-efficient investment sector, particularly within the EIS/SEIS area, it has been obvious over the course of the last 12 months just how much the Government’s changes – announced at the 2017 Budget and formalised in last year’s Finance Act – have already impacted on our landscape.

We have seen a fundamental shift here, in a very short space of time, away from the capital preservation schemes of the past which tended to ‘clog up’ the sector to the ‘knowledge intensive’, higher-risk investments designed to help start-ups and businesses in sectors such as technology and life sciences.

Recent data published by Intelligent Partnership shows that shift in full effect, and while overall we have seen a 17% year-on-year drop in the number of tax-efficient schemes open to investment, we believe those EIS that are currently open – and will open in the future – are now much more in keeping with how the sector was originally envisaged and are now supporting those businesses who can benefit the most from such investment.

According to Intelligent Partnership, in November last year, 54 EIS offers were open, compared with 65 in the same month during 2017. Given the new rules and regulations, this was always going to happen. Plus the proliferation of schemes targeting, for example, ‘capital preservation’-focused oddities such as crematorium, self-storage or indeed bulk shipping - which were often completely at odds with the shifting environment and what we would describe as the ‘spirit of EIS’ – were always going to struggle in the new world.

This has proved to be the case – indeed investments targeting the ‘media and entertainment’ sector have gone from the most popular EIS ‘investment’ to a point where they have fallen well behind ‘technology’. The market share of the former has dropped from 33% to 24%, while the latter has increased to 31.5%, although when you add in ‘generalist’ EIS funds – which invest across a number of sectors, often including technology companies – the technology number shoots up to 50%.

We anticipate this trend to continue, and we’ll see increasing activity supporting growth-focused innovations; as mentioned, the change in the rules has had a very quick and forceful impact on those managers who were active in other investment sectors.

Perhaps, given this shift, it was prophesised that some advisers would begin to steer away from EIS recommendations – after all, any mythical perceptions of guaranteed returns of capital are well and truly gone and therefore some advisers would perhaps look elsewhere.

Some might bemoan such a situation but the sector is now all about supporting new, growth-focused start-ups and scale-ups, who have quality products and services to offer, who seek rapid growth and, who clearly come with a risk to capital but also have the opportunity to deliver potentially great rewards to clients. It again, is little wonder, that we are seeing a proliferation of such investee company opportunities in the tech sector and the likelihood is that a vast amount of EIS investment money will be made available to such firms.

No other scheme offers such a broad range of tax reliefs in one place as the EIS. With EIS investors potentially able to benefit from income tax reliefs, CGT deferral, IHT mitigation, tax-free growth and loss relief; where else could such incentives be available? Now, EIS investors can also be assured that their investment is supporting companies which are growth-focused and ultimately, collectively, seeking to support UK economic growth.

The Intelligent Partnership research includes a survey of 100 advisers – 36% of which said the changes had made it more difficult to recommend EIS, but clearly for the right clients, that is not true at all. We are not saying that EIS is right for everyone, because it’s not, but the truth is that – for those for who it is the right recommendation – the quality of the investments, the managers and the whole structure is better than it has ever been.

We would urge all advisers with clients who want to maximise their tax-efficiency to look again at the EIS products that exist and the overall landscape and environment in which they operate in. It is likely to be rather different to how you might previously have envisaged it and it is likely to offer much more to clients for whom it is suitable.

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