Mark Bower-Easton, Business Development Manager, Oxford Capital
In my previous life I spent the best part of two decades working as a financial adviser. During that time, I was very active in advising on tax-advantaged investments and introduced many clients to numerous EIS and VCT fund houses. My investment recommendations were always based on what my clients wanted to achieve, be it tax relief, a tax-free income, or simply the requirement to have exposure to a class of investment unavailable anywhere else.
Now I find myself on the other side of the fence, speaking to advisers daily, and it has become apparent to me that there are some misconceptions about EIS in particular, that need to be put to bed. I recently held a webinar on this very subject, and you can find a link to it at the end of this article.
Understanding EIS timescales
One of the most common misconceptions revolves around EIS timescales. There are two different timescales that advisers and investors alike need to be mindful of, and to separate out. There are the HMRC timescales, where they quote a minimum holding period of 3-years to maintain income tax relief, and a minimum 2-year holding period to qualify for business relief, which serves to make the shareholding free from IHT, assuming they are still held upon death. Several times a month we receive enquiries from advisers and/or their clients asking when they are likely to get their money back, now that the 3-year period has elapsed. It is important to note that the reality of VC/EIS investing, and the timescales involved are quite different to the HMRC minimum holding periods. VCs are typically buying in to early-stage businesses at the seed stage, and it takes time to grow these businesses to a point where they are financially secure, have a market share, and are an attractive exit proposition. Most VCs will quote an average holding period of between 5 and 7 years. There will of course be some outliers – some will grow and exit sooner, and some might take longer.
Tax year end deployment
Another question I receive regularly is “can you fully deploy by tax year end?” If this question comes to us early in the tax year, then the response is more likely to be positive. Many investors view any type of investment with a degree of tax relief, be it lump sum pension, ISA, VCT or EIS, as tax year end planning tools. However, why not view them as year-round investments? EIS companies don’t just seek to raise money from January to March – they raise funds all year round. By only looking at investing into EIS during a very small window, advisers and investors are missing out on some fantastic investment opportunities. At Oxford Capital we typically close one deal per month. This means that if you put off investing until January you will have missed out on three-quarters of the deals we have closed during the tax year.
Understanding the differences between VCTs and an EIS Fund
As I’ve written about previously, it is no secret that VCTs are far more popular than an EIS fund. Why is that? On the face of it they look similar – investing into unquoted companies, gaining 30% income tax relief – but that is where the similarities stop. VCTs certainly have their place. If a client has hit their lifetime pension allowance and has a need for a tax-free income, then VCTs can certainly be the way to go. However, VCTs miss out on a number of other benefits afforded to EIS such as the annual contribution limit (£1 million into an EIS fund) and the numerous tax reliefs.
I believe that there are two factors making advisers and investors choose VCTs over EIS – familiarity with a fund structure, rather than a holding of individual companies, and the lack of administrative requirements with an EIS (namely having one tax certificate per investee company, rather than one for the entire investment).
Advisers and investors need to weigh up the pros and cons of each option: do the additional benefits afforded to EIS outweigh the additional administrative burden of investing in EIS?
Risk appetite and EIS
EIS are high risk investments and are only suitable for those investors with a sufficient risk appetite for early stage, unquoted companies. However, there is more to it than just attitude to risk – advisers and investors also need to consider two additional factors; capacity for loss, and requirement for liquidity. I receive a number of enquiries from advisers and investors alike saying that the 3-year holding period is up, and they would like their money back now. This obviously leads to a challenging conversation.
Investors who look at EIS as an investment opportunity need to tick all three boxes – they need to understand and accept the risks, they need to be investing an amount of money which adversely won’t affect them if they were to lose it, and they also need to be investing monies that they don’t foresee requiring access to for at least 5-7 years. If one of these boxes isn’t ticked, an EIS will not be for them.
Returning capital from an EIS investment
It always needs to be remembered that investing in to an EIS portfolio is done on a discretionary basis. This means that a VC will invest into new companies at their discretion, and they will also exit companies at their discretion. We receive regular calls from investors asking us to exit certain companies or realise a certain amount of cash from their holdings, but this isn’t possible. The reason why is very simple – the shares are unquoted, and therefore there is no market to buy/sell shares on an ad-hoc basis. Once invested, an investor will remain invested until the company exits in one way or another, typically by IPO or trade sale. That said, opportunities for secondary sales do arise, but these are an exception rather than the norm.
Tax-advantaged investments can be difficult to navigate. It takes time to learn their intricacies, but used right, and for the right client, they can be an effective way of increasing investment returns and help to optimise tax situations.
You can watch my recent webinar on EIS here
You can talk to me about EIS and tax planning strategies at my weekly clinic, here
Mark Bower-Easton, Business Development Manager, Oxford Capital
Oxford Capital Mark is Business Development Manager at Oxford Capital. He is responsible for building and maintaining relationships with private clients, intermediaries, family offices and institutions, for the ongoing raising of funds for Oxford Capital’s investment strategies. Mark has extensive experience in financial services, qualifying as a financial advisor in 2004, and as a stockbroker in 2006. Prior to joining Oxford Capital, Mark was a Partner in a FTSE 100 wealth management business for nine years, dealing with HNW and VHNW clients, and was very active in the tax-advantaged investments marketplace.