Deepbridge’s Aldridge: top trumps for tax-year end planning in the tax efficient investment world

Andrew Aldridge, Partner at Deepbridge Capital

By Andrew Aldridge, partner and head of marketing at Deepbridge Capital

Top Trumps, the classic age-old card game we’ve all enjoyed over the years, is described as, ‘Each card contains a list of numerical data, and the aim of the game is to compare these values to try to trump and win an opponent’s card.’

In the world of tax efficient investments this is often replicated on the standard presentation slide that shows the varying tax reliefs available via various Government incentive schemes including, but not exclusive to: pensions, ISAs, business (property) relief, agricultural relief, social investment tax relief (SITR), venture capital trusts (VCT), the seed enterprise investment scheme and, of course SEIS’s big brother, the enterprise investment scheme (EIS).

The reliefs of these various schemes can, broadly speaking, be placed into three different categories: income tax, capital gains tax and inheritance tax.

At Deepbridge, we believe there are certain schemes that could be considered as ‘top trumps’, depending on our clients’ needs.

Pensions and ISAs should be central components of all sound financial planning. Business relief and agricultural relief are excellent inheritance tax (IHT) planning tools – with a Deepbridge Capital adviser survey in 2021 concluding that Business Relief was an advisers’ second most common IHT mitigation tool, with only gifting more commonly used.

SITR has largely been overlooked as providers have struggled to find ways to provide investor returns. So, that leaves VCTs, SEIS and EIS.

SEIS has by far the most generous tax reliefs, with 50% income tax relief, 50% CGT mitigation, CGT free growth, IHT exemption and loss relief all available. However, SEIS funding is the very earliest venture capital going into early-stage unquoted companies and, therefore, should be treated as extra high risk and really only suitable for those with the appropriate appetite and capacity.

VCTs are, perhaps misleadingly, then seen as ‘the safe’ option for those investors seeking uncorrelated growth from a venture capital portfolio. The income tax relief is appealing and many funds will be seeking to provide tax free income and growth from a portfolio of ‘later-stage’ unquoted (and by unquoted we include AIM) stocks.

However, the EIS is the king of tax incentivised Investment schemes. Unless an investor specifically requires an income (dividends from EIS stocks are taxable, but also uncommon), then there is no more generous a tool for comprehensive tax planning; whilst also introducing clients to growth-focused venture capital within their wider diversified portfolio.

Income tax relief, tick; CGT mitigation, tick; CGT-free growth, tick; IHT exemption via business relief qualification, tick; loss relief, tick.

Share loss relief is an important component within the EIS mix as it offers a degree of downside protection not found in any other scheme, other than SEIS. I have recently heard suggestions that the record-popularity of VCT investing this year has been driven by investors seeking venture capital exposure but perceiving VCT as ‘lower risk’ than EIS – in the words of Boris Johnson; “rhubarb!” VCT and EIS on any risk rating are very much high risk, one offers share loss relief and the other does not. Add in the business relief qualification of EIS, and it’s a compelling argument that EIS is the ‘top trump’ of tax incentivised schemes.

VCTs can be extremely useful products and there are numerous opportunities in the market, and if a client specifically needs an income producing product (although income is far from guaranteed) then VCTs are useful tools. However, EIS is the real driving force that is funding UK innovations and job creation – without EIS funding, a good proportion of VCT companies may not exist.

It is great that VCTs are in such high demand, with 2021/22 expected to smash all previous fundraising records, but EIS will likely provide even more funding to growth-focused companies this year and should be considered at their forefront of great advisers’ toolboxes.

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