News

Efficiency savings: adjusting to the new tax-advantaged investment landscape has been commissioned by LGBR Capital to delve into the issues raised by recent regulatory developments with regard to tax-efficient investments. Its author, Scott Longley, talks to market participants and commentators to gauge opinion of what these specific measures mean for the industry and asks how they will affect the investment decisions throughout the sector. It also looks forward to ask whether we have reached a level of regulatory stability and questions what this means for the funds and their investors.

Click here to view the report

For more information on LGBR Capital’s range of tax efficient products please click here or call 020 3195 7100.

 

Find a Wealth Manager has recently published an article by Jack Rose, Business Development Director for Tax Products at LGBR Capital on why investors should look at EIS, VCTs and BPR.

Click here to view the whole article

To find out more about tax efficient investing please click here or call 020 3195 7100.

Jack Rose, our Business Development Director for our Tax Products, writes a clear article on FindAWealthManager.com exploring all about VCTs, the benefits and the role of incorporating one into an investor’s portfolio.

“Venture Capital Trusts offer a raft of attractive reliefs which higher-rate taxpayers cannot afford to ignore” 

Click here to read the full article

For more information on VCTs please email LGBR Capital or call 020 3195 7100

Although the full impact of HMRC’s recent VCT rule changes will not become clear until Royal Assent is obtained (expected early November) at this stage it looks likely that VCTs may have to alter (to a greater or lesser degree depending on their investment strategy) how they source and select investments. The most affected would seem to be those VCTs that concentrate on management buy-outs (MBOs). As a result, we are likely to see fewer VCTs coming out with offers this tax year and many VCTs waiting until after Royal Ascent to make a decision, which means their offers may not open until early 2016.

 

Since 2015/16 looks set to be a shorter VCT season with fewer participants, it would seem highly unlikely that funds raised will reach anywhere close to the £429m raised last year (which was the largest amount raised since 2005/06)*. This is a dilemma for advisers as supply is reducing just at a time when other HMRC rule changes, such as the lifetime cap on pension contributions, has strongly increased client demand for tax-efficient investment products.

 

So until we get clarity on the new VCT rules, what can advisers do in the meantime?

A potential alternative are Enterprise Investment Schemes (EIS). EIS were created by the UK government on a very similar premise to VCTs – to provide funding to UK SME businesses – and, as such, EIS have many of the benefits of VCTs, including: 30% upfront income tax relief (three year minimum holding period for EIS vs. five years for VCTs) and no capital gains upon realisation.

 

EIS also have some added benefits not available to VCTs, including: 100% IHT relief for EIS investments after only two years (through Business Property Relief) and the ability to carry back the 30% income tax relief to the previous tax year from which the investment is made.

 

However, there are differences – most notably the fact that rules surrounding the type and size of companies that qualify for EIS mean that they tend to focus on smaller, riskier companies compared to VCTs. Further differences include the fact that VCTs are listed on the London Stock Exchange whereas EIS are not, meaning a much less liquid and obvious secondary market for EIS. As such, advisers will need to make sure that their clients are suitable for the level of risk associated with EIS investments.

 

What might surprise advisers is that assets into EIS last tax year more than doubled those into VCTs (over £1bn raised**). In such an established market, there is ample choice for advisers looking for a diverse number of EIS propositions, whether by manager or investment strategy. Therefore, for the right client, they can provide advisers with a viable alternative to VCTs during the current rule uncertainty and beyond…

 

* Source: The AIC – http://www.theaic.co.uk/

**Source: National Statistics – HM Revenue & Customs – EIS and SEIS Commentary Note – https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/448308/July_2015_Commentary_EIS_SEIS_Official_Statistics.pdf

 

This communication has been issued by LGBR Capital LLP, Candlewick House, 120 Cannon Street, EC4N 6AS. LGBR Capital LLP is an appointed representative of Mirabella Advisers LLP, which is authorised and regulated by the Financial Conduct Authority. The document is intended to be communicated solely to persons that fall within the FCA Classification of ‘Professional Client’.

This document does not constitute a recommendation, or an offer to buy or sell any security or fund, and is not intended to substitute the offering documents or prospectus of any fund. Venture Capital Trusts (“VCT”), Enterprise Investment Schemes (“EIS”) and IHT mitigation service are relatively complex products with significant performance and liquidity risks. Your capital is at risk if you invest in a VCT, EIS or IHT mitigation service and you may lose some or all of your money invested. Any decision to invest in a VCT, EIS or IHT mitigation service should be made solely by reference to, and strictly in accordance with, the information, terms and conditions contained in the Prospectus and Application Form. Before deciding to invest, investors should carefully consider the product’s investment objectives, risks and expenses and other information as set out in the Prospectus and Application Form.

The statements and opinions set out in this document are made as of the date of publication, and may not be applicable thereafter. Opinions are based on our analysis of data that we believe to be objective and reliable; however we accept no liability in respect of its completeness or accuracy.
Rates of tax, tax benefits and allowances are based on current legislation and HMRC practice and depend on personal circumstance. These may change and are not guaranteed. Past performance is not a guide to future performance; the value of an investment and income from it can go down as well as up. Prospective investors are advised to consult their own professional advisers before contemplating any investment. No representation or warranty expressed or implied is made or given by any person as to the accuracy or completeness of the information contained in this email and no responsibility or liability is accepted for any such information. This material may not be distributed, published or reproduced in whole or in part.

 

Background

Only launched in 2012, Seed Enterprise Investment Scheme (“SEIS”) is the newest addition to the government’s range of schemes that offer tax incentives to investors in order to encourage fund raising into smaller, entrepreneurial UK companies.

Whilst the SEIS structure has not been around long, it is very similar to its bigger brother the Enterprise Investment Scheme (“EIS”), which has been around for over 10 years and has attracted £10.7bn (most recent data 2012/13 tax year) of assets.

As its name suggests, the main difference between an SEIS and EIS is that SEIS rules restrict the size of qualifying companies to very early stage, “start up” businesses. Because of the extra risk associated with very early stage companies, the tax incentives for SEIS companies are also more generous than with EIS companies.

Since their introduction, the number of SEIS companies has been growing  at an increasing pace, with over 1,100 companies receiving investment to the end of 2012/13 tax year, totalling £80m  (Source: HMRC & National Statistics Report Dec 2014). [DAN: These stats are only for first year of SEIS 12/13.  £80m first year but grown significantly since although no stats to back up as 12/13 is most recent until Dec15.]

 

How they work

The rules surround SEIS companies, how they qualify and what they can invest in are broadly similar in philosophy to the rules surrounding EIS companies. [Click here to read my previous article on EIS and how they work]. However, there are some fundamental differences with SEIS companies, including:

• The Small Companies Enterprise Centre (SCEC) decides if a company and share issue qualify and will continue to monitor them to ensure they continue to meet the requirements
• An SEIS qualifying company can raise a maximum of £150,000 under the scheme
• An SEIS company cannot have more than 25 employees, cannot be more than 2 years old and cannot have more than £200,000 assets
• Like EIS companies, certain trades are excluded, including forestry, financial securities among others

 

SEIS Tax Benefits

Once again these are broadly similar to EIS but with a noticeable increase in the amount of upfront income tax relief offered from 30% to 50%. The enhanced relief reflects the increased risk of investing in very early stage companies.

• 50% income tax relief (subject to a 3 year minimum holding period and a maximum of £100,000 investment in any one year)
• 100% inheritance tax relief after two years
• Capital gains reinvestment relief (if you sold an asset and reinvested all or part of the amount of the gain in shares which qualify for SEIS, half the amount reinvested may be exempted from CGT)
• Profits from the sale of an SEIS investment are completely free of CGT
• Loss relief is available to offset against earnings, unique to SEIS and EIS.  The unrelieved portion can be offset at the marginal band of the investor. Therefore a 45% tax payer would have a further 22.5% of the investment returned in the event of a liquidation.

 

Ways to Access SEIS 

SEIS has benefitted enormously from the ever increasing popularity of equity crowd-funding websites. These platforms offer access for private individuals to invest in SEIS opportunities in a self-styled ‘Dragon’s Den’. Unlike EIS and VCT, much of the capital raised has been raised through private investors directly through either the equity crowd funding, or a ‘friends and family’ approach.

Market leaders such as CrowdCube offer an efficient solution to these retail investors, whereas alternatives such as the Seed EIS Platform offer a single company investment solution for the advised market.  A combination of factors including the immaturity of the marketplace and increased risk has led to a slower uptake from the adviser community, it remains to be seen if this will change as the SEIS marketplace develops.

Daniel Rodwell, CEO of Seed EIS Platform is positive on the outlook; “Seed EIS continues to gather momentum as the market matures, with a growing number of exciting new businesses benefitting from the scheme.  The generous tax reliefs mitigate investment risk significantly, increasing access to seed capital and driving growth and innovation within the UK.  Seed EIS Platform enables advisors to offer SEIS and EIS single company solutions to clients, investing alongside our network of sophisticated early stage investors.”

 

What type of clients are suitable?

If it is true that, as mentioned in my previous article, EIS is not suitable for every client, this is doubly so for SEIS. Due to the investment focus on very early stage companies then the reality for investment in SEIS is that really no one should be investing money they cannot afford to lose.

Due to the lack of liquidity and increased risk of company’s failing in their fledging stages, investments should be viewed as a long-term investment ‘punt’ rather than core part of one’s investment portfolio.

For those clients that can accept this level of risk and have the disposable capital, and like the notion of supporting young British companies with the opportunity of finding the next ‘big’ thing then SEIS can offer a good opportunity to gain access to this area of the market.

 

Background

The UK government established Venture Capital Trusts (VCTs) almost 20 years ago to encourage investment into smaller UK businesses. The generous tax benefits offered compensate for the increased risk associated with investing in smaller, less liquid companies.

Since their introduction in 1995 to the end of the 2013/14 tax year, VCTs have raised over £5.4bn according to the AIC, providing important support and funding to the UK’s SME sector.

Research from the AIC also suggests historical performance has been strong. The average total return for a VCT investment of £100 to 31 December 2014 was £164 over 5 years and £197 over 10 years (Source: AIC).

 

How VCTs work

In many ways, VCTs are similar to investment trusts but with additional investment rules in order to qualify for tax reliefs. VCTs are plcs and are listed on the London Stock Exchange. Investors subscribe for shares in a VCT, which will then look to invest into a portfolio of “qualifying” companies.

There are several investment criteria underlying companies must meet to be VCT qualifying including, but not limited to:

• Companies must be unquoted or AIM listed
• The maximum value of a company’s Gross Assets (before VCT investment) is £15m
• The company cannot have more than 250 employees (before VCT investment)

At least 70% of a VCT’s cash must be invested in qualifying companies within 3 years. The remaining 30% can be invested in non-qualifying investments, such as cash, listed equities, debt and investment funds.

Because of the numerous rules to which VCTs must adhere in order to qualify for tax breaks, it is important to choose an experienced manager. We will be going into more detail on what to look for in a VCT manager in next week’s article.

 

Tax benefits

VCTs have a number of attractive tax benefits for investors. Initial investments can qualify for 30% income tax relief, subject to a maximum of £200k per investor and a five year minimum holding period. Furthermore, dividends paid are tax free and there is no capital gains tax (CGT) to pay when the VCT is sold.

 

Types of VCT

All VCTs invest into smaller UK companies however the market tends to split managers into four main types:

Generalist VCTs	AIM VCTs	Specialist VCTs	Limited Life or Planned Exit VCTs
As the name suggests, they invest in a general portfolio of companies across the smaller and private equity universe, often across multiple sectors.	Focus on companies listed on the AIM market. These are the only listed companies (daily priced) that “qualify” under VCT rules. AIM has been around since 1995 and is now a mature exchange, with more than £88bn raised and a total of 1,100 companies.	Focus on companies in a specific sector, such as renewable energy, leisure, media or technology, where the manager believes they have an edge.	Similar to Generalist VCTs but tend to focus on lower risk, lower return companies with the main objectives of capital preservation and providing liquidity as soon as possible after the minimum five year holding period.

 

The role of a VCT in an investor’s portfolio

Financial advisers should analyse the VCT market thoroughly before recommending them. The AIC website provides a lot of useful research and information in this regard.

What type of clients are VCTs suitable for? Firstly, VCTs should be considered on their investment merits rather than simply a way of accessing tax reliefs. Given their focus on smaller, less liquid companies, VCTs will not be suitable for every client.

However, for those UK tax payers that can accept a higher level of risk and the minimum holding period of five years, VCTs can play a useful role in their portfolio.

The 30% upfront tax relief makes VCT suitable for clients looking to offset a large income tax liability. VCTs can also provide an option for investors seeking tax free gains, especially if they have already maxed out their ISA and pension contributions for the year.

Furthermore, because they offer tax-free dividends, the majority of VCTs will focus on providing regular income alongside capital gains. As such, VCTs can complement an investor’s income portfolio.

Chris Hutchinson, Manager of the £100m Unicorn AIM VCT comments: “VCTs are sometimes mistakenly considered as being solely focused on achieving returns through capital growth, but in reality many VCTs deliver attractive returns via regular tax-free dividend payments.”

 

Background – What is IHT?

 

In its very simplest terms, inheritance tax is the tax paid on an individual’s assets when they pass away. Assets can include money, investments and property – the estate, which is usually passed to, or inherited by the friends and family of the deceased.

Should the value of the ‘estate’ (minus any debts outstanding) be valued in excess of £325,000, otherwise known as the nil rate band (NRB), a 40% tax is levied on the amount in excess of this threshold.

 

To illustrate the impact of this:

Estate value:       £525,000

NRB:                  £325,000

Taxable Estate:   £200,000 @ 40%

IHT Bill:              £80,000

 

Married couples are able to pass their estate to each other tax-free on death along with any of their nil rate band not used. This can potentially boost their NRB to £650,000 for the remaining widower.

 

The Growing Problem

 

Although once perceived as a problem only for the wealthy, an ever increasing number of people are finding themselves falling into an IHT liability. According to the Office of National Statistics, over £3.4bn was raised during the 13/14 tax year through IHT, £300m than the year before, meaning that IHT receipts have increased a substantial 43% since the 2009/10 tax year.

The well documented rise is asset prices we have seen in recent years, especially across London and the South East where house prices have risen on average 17.8% and 14.4% respectively in the last twelve months. The average house in London now costs on average £406,730 meaning that the number of people set to fall into the IHT trap is only set to increase.

The issue is further exacerbated by the nil rate band currently being frozen at £325,000 until 2018/19. Despite suggestions from various political quarters that the NRB will be increased to potentially £1,000,000 we can only plan for the current situation, not how it may develop in the future. This leads me onto how Business Property Relief (BPR) can help to reduce one’s IHT liability.

 

The solutions & specifically why look at BPR?

 

Unlike many of the alternative IHT solutions that are out there such as; gifting, trusts and equity release BPR offers a quicker and more flexible solution to the issue. Unlike trusts and gifting which are often complex and involve relinquishing ownership and control, BPR does not, meaning that should the tax landscape alter and the NRB be raised then any investment decision could potentially be reversed.

 

What is BPR and how does it work

 

BPR was introduced back in 1976 in order to allow small family businesses to be passed down from generation to generation without triggering an IHT liability. Since then those companies that qualify for BPR has been expanded, making it an attractive tax planning tool for individuals. Shares in BPR qualifying companies are zero-rated for IHT purposes after only two years, in other words they are outside your estate after 24 months.

 

There are three ways BPR can be accessed; EIS (which we discussed in our previous article), AIM portfolios (which we’ll discuss next week) and ITS strategies. The latter option are usually discretionary management services structured and managed by investment managers, who give investors access to a one or a number of underlying companies which qualify for BPR. These ITS strategies have grown in popularity in recent years, although often they are regarded as high risk in nature due to their investment being in small unquoted businesses. It is important to look at the risk in the underlying trade of the business and experience of the management team running the service when considering a client’s suitability.

Commenting on how BPR can be used, James Cranmer, a Partner at Triple Point says, “At Triple Point we have been using BPR to help investors mitigate their IHT exposure since 2006. It provides them with the fast and simple solution they are looking for. We can give investors access to businesses active in leasing and infrastructure funding, a popular choice with investors looking for rapid IHT mitigation and capital preservation.”

 

BPR Benefits

 

• Speed: Unlike many other forms of estate planning such as trusts and gifting which can take up to seven years, BPR is outside your estate after two years
• Flexibility and Control: As mentioned earlier, because you own the shares you retain control, you can top-up or redeem as you need
• Simplicity: BPR is relatively straightforward, there are no complex legal structures, medicals etc.

 

BPR’s role for investors

 

Often for those clients where either there are legal or medical complications BPR can often offer a solution to help reduce an IHT liability. Because an investor owns shares to qualify for BPR it can make it particularly attractive for those clients with Power of Attorney in place as there are no issues with relinquishing control of the assets.

Obviously the speed at which BPR assets can be removed from one’s estate (two years) compared to some other planning ideas such as trusts and gifting (seven years), which can take up to five years longer make it an option for those that need to act more quickly.

As always it is important to consider client’s individual situation when considering BPR. It will not be suitable for all and there is a huge range of differing strategies and ways to access BPR that will work for different clients.

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 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.

 

Conclusion                                                                        

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

Director and Senior Fund Manager, Chris Hutchinson, introduces Unicorn Asset Management, the team and their investment philosophy / process