Background Enterprise Investment Schemes (EIS), Venture Capital Trusts (VCTs) and Business Property Relief (BPR) products are by no means new in the market place. BPR was first introduced in the 1976 Finance Act, EIS replaced the old Business Expansion Schemes in 1994, whilst VCTs were introduced in 1995. Whilst figures for assets raised in BPR […]
Enterprise Investment Schemes (EIS), Venture Capital Trusts (VCTs) and Business Property Relief (BPR) products are by no means new in the market place. BPR was first introduced in the 1976 Finance Act, EIS replaced the old Business Expansion Schemes in 1994, whilst VCTs were introduced in 1995.
Whilst figures for assets raised in BPR schemes are hard to come by, the last tax year saw £1bn raised across EIS and VCTs. Since their inception EIS have attracted over £10.7bn* and VCTs over £5.4bn** into the UK SME sector.
However, despite all three structures having an established market with a +20 year track record, many financial advisers still do not include them in their tax planning arsenal – even though recent changes in government legislation have made the case for these tax efficient structures even more compelling.
The introduction of GAARs (General Anti-Abuse Rules) and DOTAS (disclosures of tax avoidance schemes) has been described as the ‘kiss of death’ for aggressive tax avoidance schemes, demonstrated by a number of high profile cases in the tabloids over recent years. This is leading many advisers, helped by the new RDR ‘whole of market’ legislation, to look towards government approved EIS, VCTs and BPR for their tax planning needs.
Why the Tax Breaks?
Each of the three structures offer a number of different tax incentives allowing them to fulfil different needs in an investor’s portfolio. For example, VCTs offer tax free dividends to investors meaning they may be more suitable to an investor looking to maximise income.
However, a golden rule of investment is that you don’t get anything for free. The generous tax incentives offered by the government are designed to offset the risk of investing in smaller, unquoted companies. Furthermore, investments into these strategies must meet certain criteria both at the investor level (such as minimum holding periods to qualify) and the underlying investment level (such as a maximum revenue size or number of staff). With the higher risk nature of these strategies, they are not always suitable for every investor but for the relevant client they can form an important part of an investor’s portfolio.
Catalysts Behind the Growing Market
Aside from the changes in government legislation outlined above, there are a number of other factors driving the growth in the market.
Firstly, recent changes in pension rules (lowering the annual and lifetime contributions to £40,000 and £1.25m respectively) combined with the added to take drawdowns (vs. annuities) has meant advisers have a series of alternative pension planning investments to consider, including VCT products in particular. The tax free dividends offered by VCTs make them an attractive alternative source of tax-free income that can complement a traditional pension portfolio.
Secondly, inheritance tax continues to be an ever-growing problem for advisers and their clients, exacerbated in areas such as London and the South East by rising property prices that have continued unabated even post-2008. The result is that a record number of people’s estates are due to fall outside of the current nil rate band of £325,000. Official forecasts suggest that inheritance tax revenues are anticipated to take the highest share of the economy since the 1970s and expected to rise by nearly 11% a year for the next four years, according to the Office for Budget Responsibility.
With the government stating that the nil rate band will remain at the current level until 2018/19, BPR strategies offer a simple way for investors to reduce their IHT liabilities after just two years. Furthermore, BPR strategies offer a flexibility, control and timescale that traditional estate planning options, such as trusts, often cannot.
Lastly, the dynamics for SME asset raising through EIS and VCT structures continue to be favourable. Six years on from the 2008 financial crisis and, despite the more recent economic upturn, the market for SME funding remains well below pre-2008 levels. With traditional sources of funding difficult to secure, demand for funding via EIS and VCTs far outstretches supply. This has created a positive environment for EIS and VCT managers with a number of potential deals in which to deploy new cash.
There are a diverse range of EIS, VCTs and BPR products available in what is long-established, multi-billion pound market that provides vital investment into the UK SME sector. Each structure provides a different range of tax planning benefits, which can fulfil a range of clients’ tax planning needs.
In the coming weeks we will examine EIS, VCTs and BPR strategies in further detail, including their key features, how best to utilise them in a client’s portfolio and what to look for in a good manager.
However, until next week it is suffice to say that these structures can form a valuable part of an adviser’s tax planning arsenal, with the market and demand only set to grow.
*Source: HMRC, December 2014 https://www.gov.uk/government/statistics/enterprise-investment-scheme-and-seed-enterprise-investment-scheme-statistics-december-2014
**Source: AIC, April 2013 https://www.theaic.co.uk/aic/news/press-releases/vct-sector-raises-%C2%A3403-million-in-201213-tax-year