For many, it has become increasingly difficult to build and sustain tax efficient investment portfolios that can be used to provide capital and income in retirement, particularly with limits on pension contributions and total pension pots. For the right investor (and they are certainly not suitable for everyone) consideration should be given to what the suite of Tax Advantaged Investments (TAI) can offer. These investments include –
- Venture Capital Trusts (VCT)
- Enterprise Investment Schemes (EIS)
- Seed Enterprise Investment Schemes (SEIS)
Whilst different in construction they all invest in smaller UK growth businesses.
Let’s consider some frequently asked questions, dispel some myths and outline how these investments might be used as part of the financial planning process.
- They are risky and I could lose my investment? – You are investing in smaller UK growth businesses so the risk of capital loss and company failure is certainly greater than investing in established companies on mainstream public equity markets. The tax relief provides a ‘cushion’ to offset some of these risks but again it is important that all investors do understand the nature of the risk involved. Enterprise Investment Schemes (EIS) offer 30% income tax relief on investments up to £1m per tax year (can be more depending upon investor activity in the previous year and the type of companies the EIS invests into). Should that EIS fail a top rate taxpayer would be entitled to receive a further 45% tax relief on the net investment (after deduction of the initial 30% tax relief). This provides another 31.5% tax relief. So, up to 61.5% of the investment is protected through the tax system. This figure rises to 72.5% for Seed Enterprise Investment Schemes which offer investment into earlier stage UK growth businesses.
- These are investments into companies I have never heard of? – As smaller businesses, this is to be expected but companies like Five Guys, Rated People, Plensih, Gousto, Bloom & Wild, Lyst, Lovefilm and Cazoo have all employed TAI capital in their growth and development.
- Investment into VCT, EIS and SEIS will bring me into conflict with HMRC? – Not at all. These investments are not considered tax avoidance, are supported by Government policy and in many cases, the underlying investment receive specific approval from HMRC. Why is this? Well, at it’s simplest level there exists a ‘Quid Pro Quo’. Yes, HMRC are offering generous tax incentives for investors but young, growing, scalable businesses will, in time add to the UK ‘tax take’. They will employ people who will pay income tax and National Insurance, they will buy things that pay VAT, they will sell the business and create capital gains tax etc. It is the ultimate ‘win win’. So, investment into the TAI space benefits the economy, supports innovation, increases productivity, creates employment and boosts growth.
- Are they really all that tax advantageous? – EIS and VCT investment offers a 30% income tax relief upfront. This rises to 50% for SEIS investment. As long as the investments are held for their requisite minimum periods investors receive tax free growth and exit. With VCT’s tax free income is also a feature. Investors into EIS and SEIS can defer or ‘write off’ capital gains tax exposures that have been created in other parts of their financial life. Investments into EIS and SEIS could be considered outside your estate for inheritance tax purposes after the underlying investments are held for a minimum of 2 years.
- How do I get my money out should I need to? – EIS, SEIS and VCT investments are not liquid in the same way as mainstream funds or shares. Shares can be exited but this can come at a cost or tax disadvantage particularly if this is during the minimum hold period. Investors should consider these as long term, unfettered capital and investments of this type should represent the minority not the majority of clients interests therefore enabling investors to access capital in other areas first if it should be required.
As part of an overall financial plan it is important to consider all available opportunities that are suitable for a client’s circumstances. We would be looking initially (where possible) to utilise pension, ISA, capital gains and dividend allowances before considering investment into the TAI arena. However, these investments can add diversification or for instance, can be part of income planning in retirement with a regular flow of tax free income from VCTs. EIS and VCT investment has come a long way from its more humble beginnings back in 1994/95 and should be considered for those clients with considerable portfolios looking for new avenues of investment, those with appropriate risk profiles and those whose circumstances mean that the tax features of these vehicles will benefit them.
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