Why investing is for life, not just the end of a tax-year

Andrew Aldridge
17th April 2018
Andrew Aldridge Deepbridge Capital
" I think it’s also important not to view the EIS/SEIS market as in some sort of stasis period, just because the previous tax-year has ended and a new one has begun."

The weeks preceding the end of any tax-year tend to be busy for all financial advisers but especially so for those considering tax-efficient investments. For better or worse, there is something of a ‘tradition’ to wait until the very last minute in order to make those investments and, while I wouldn’t use the term ‘mad rush’, there is definitely an upturn in activity as we all seek to make sure we beat the 5th April deadline.

For our investment team it is a particularly busy period, as we make a commitment to ensure that all EIS money is deployed within a given tax year, unlike some of our competitors, who can wait up to two years before deploying cash. This is an important message for investors who clearly won’t want to wait that long before they see their capital utilised. We were delighted to deploy all EIS capital raised in the 2017/18 tax year by the end of the tax year as planned. This saw a number of exciting new investee technology and life sciences companies join our portfolios.

Also, in 2018, not only have we had this focus on pre-end of tax year investments, but there has been a lot going on within and around the tax-efficient investment sector, particularly when it comes to EIS and Seed EIS.

All the changes that were announced in last November’s Budget, post-Patient Capital Review, have now made it onto the Statute Book give that the Finance Bill has now received its Royal Assent. This, as you will know, makes for a rather different environment for EIS in this tax year, and beyond, and fundamentally shifts investment away from capital preservation schemes to those which invest in ‘knowledge intensive’ businesses and where investments meet the Government’s clear ‘Risk to Capital’ condition. It will, no doubt, take time for some managers, advisers and clients to get used to this.

On top of this, while the sector was not expecting any great shakes from last month’s Spring Statement – indeed, it was heavily trailed as a look at the economy’s numbers and little else – that wasn’t really the case at all. The Chancellor, Philip Hammond, spoke a lot about investment in entrepreneurial firms, small businesses and the like, and how this Government was going to create a better position for those seeking investment, so we perhaps shouldn’t have been surprised to hear him talk about the perceived need for, what it calls, a Knowledge Intensive EIS, and how this would complement other funds already in existence.

This would not be a new scheme but it does present new rules and greater levels of complexity, plus (of great importance) some potential new incentives for investors. Those mooted include: a dividend tax emption, CGT Reinvestment Relief, extending IT or CGT carry back; and up-front tax relief. The Government published a consultation, looking for responses on what a Knowledge Intensive EIS should look like and how it might fit into the new structures that have been brought into existence by the Finance Bill.

For what it’s worth, we at Deepbridge feel that our EIS products are very much in line with the ambitions for a Knowledge Intensive EIS, with all of our technology and life sciences investments to date meeting the ‘Knowledge Intensive Company’ criteria. For high-tech companies which are developing their concept, establishing new products, and seeking commercialisation funding, the EIS and Seed EIS continue to provide significant levels of capital whilst offering investors with access to companies that are seeking potentially significant growth.

On top of this, I think it’s also important not to view the EIS/SEIS market as in some sort of stasis period, just because the previous tax-year has ended and a new one has begun. Waiting 11 months in order to make an investment on a client’s behalf is an inordinate amount of time, especially when you consider that investments in companies are being made now, growth is being achieved from now, and tax reliefs are awarded all year round. Consideration of EIS as a product type and tax-planning tool should form part of a client’s annual review at any point – not just during the final throws of the tax year.

It reminds me of that old advert about buying a pet, ‘A dog isn’t just for Christmas, it’s for life’; instead we might say that tax-efficient investing isn’t just for prior to the end of a tax-year, it’s for all year round. From our perspective, we are investing in quality, knowledge intensive, growth-focused companies all year round and those advisers that save their EIS considerations to the end of the tax year may find their clients miss out on some great investee companies which are fully funded prior to this period.

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