Jack Rose (above), Head of Tax Products, LGBR Capital takes a look into his crystal ball to find out what 2017 may bring.
As we start to look towards the end of the 2016/17 tax year and beyond, what is the outlook for tax-advantaged products such as EIS, VCTs and inheritance tax (IHT) mitigation products?
Thankfully the most recent Autumn Statement, by the standards of the last couple of years, was relatively benign with very few changes of significance. The only two things of note are a review of the HM Revenue & Customs certification process, which is welcome and will hopefully lead to streamlining and speeding up the current system, and an announcement regarding Social Investment Tax Relief (SITR).
The government has tightened what trading activities may or may not qualify but importantly they have also raised the maximum investment amount to £1.5 million. Whether this is enough to see providers start to produce products for the advisory market is still a little early to tell, but it could be enough to encourage some early movers into this space. Others providers may wait until the investment limit is brought into line with EIS at £5 million, which will make it more commercially viable.
Increasing demand
From an adviser perspective the overriding theme in 2016 seems to have been an ever-increasing demand for tax advantaged investments, because of alterations to pension rules and I cannot see this changing in 2017. In fact I only see it increasing. As investors start to use all their carry forward allowances and the restrictions for additional-rate taxpayers start to take even greater effect, it will lead to demand for EIS and VCTs continuing to rise. For those people earning over £210,000 a year who are now restricted to only putting £10,000 into their pension annually, VCTs and EIS can offer a complimentary solution for the right client.
Additionally there are the investors who are starting to reach the lifetime limit of £1 million on their pension and wondering where else they can invest in a tax efficient manner. However, for those considering EIS and VCT investments, it is worth highlighting that investors need to be careful not to consider them as a substitute or replacement for pension contributions; there is a vast difference in risk profile between the two. However, for the right person and taken in context of their entire investment portfolio they can provide a powerful complementary option.
Capacity constraints
The problem for many people is that there will be capacity constraints into certain EIS and VCT products, especially from providers with long, established track records. This capacity constraint has been driven both by increased investor demand (pension restrictions etc.) but by decreased supply. Significant legislative changes in the last 12 to 18 months have impacted some investment products and investment deal flow, which has resulted in the managers limiting new capital raises or, in some cases, pausing new capital raises in their entirety.
These two factors have meant that advisers and investors have had to be on the ball and move quickly to get access to the products and investment managers they want. This is a problem that I do not see disappearing. Demand is only set to grow; EIS raised about £1.8 billion last tax year and VCTs around £460 million and I would be surprised if we did not see more money into both structures next year. The only thing that might curtail the amount of money invested in EIS would be the impact of energy generating assets being removed from the sector in the last Budget.
The EIS landscape has altered significantly in recent years and there has certainly been a shift up the risk scale within EIS as a result. There are obviously products and providers that focus on minimising risk by either having a revenue guarantee or asset underpinning the proposition, but in general the deal flow for these products is restricted and there is far more money chasing those sorts of deals than there are those kind of investments available.
So far providers are yet to deliver enough capacity to fill the hole in the market left by renewables (about £500 million) and it remains to be seen whether investors are happy to move towards the growth capital focussed products. It also needs to be said that many of those managers are still restricted by the seven-year rule on their qualifying investments which is impacting deal flow, meaning providers are looking at less mature businesses which is also pushing the risk profile upwards.
Access to IHT products
As for IHT products that utilise business relief I see no changes to the ever increasing demand for these sorts of products; both non-AIM and AIM focussed. With IHT receipts hitting a record high at circa £4.7 billion last year and more people falling into the IHT trap, an increasing number will continue to turn to BR as a solution. One area to look out for are the recent changes to power of attorney agreements and discretionary fund management powers. Many IHT strategies that utilise BR are structured under a discretionary agreement and investors may not be able to access these unless they have the appropriate clauses in their power of attorney agreements.
All in all this year should continue to see increased interest from advisers in this area of the market, with more flows following as a result. Government rhetoric seems supportive of both the EIS and VCT legislation, recognising the importance of both vehicles in providing much needed patient capital for young SMEs across the UK. Advisers and investors alike are becoming more familiar with and confident investing in this area and driven by wider pressures such as pensions and inheritance tax this will continue to help push capital into EIS and VCT strategies.
