LGBR Capital – which works in partnership with investment managers at the forefront of the sector to develop and distribute tax efficient products to UK investment intermediaries – says its new report has revealed that changes to the rules guiding tax-advantaged investing, combined with recent government moves to bring to an end tax relief for renewables, will see the sector turn to earlier-stage companies, according to VCT and EIS managers and commentators.
The new rules announced in the summer budget* alongside the final ending of the energy investment opportunity announced in the March budget, mean that funds and investors across VCTs, EIS, and SEIS will be forced to move up the risk scale to find companies to invest in.
Quoted in the report – ‘Efficiency savings: adjusting to the new tax-advantaged investment landscape’ – Chris Hutchinson, director and senior fund manager at Unicorn Asset Management said that because of the new rules “inevitably we will be looking at slightly earlier-stage businesses than has been the case historically”.
Tax-advantaged balancing act
Jack Rose, business development director at LGBR, points out that the tax-advantaged balancing act should be viewed as a see-saw between the investment managers and the government, with the latter attempting to cajole investors into bridging the finance gap that exists for SMEs while at the same time the managers seek to trim risk as much as possible.
“All legislation in this area is effectively a process by which the government of the day subtly – or sometimes not so subtly – shifts the balance of the rules while the managers will always work within them to try and find the best investment for their clients,” he says.
In the VCT arena, the new rules were deemed to have the greatest effect in the generalist sector where fund managers have been more reliant on MBOs. But fears that fund-raises across the sector would fall well short of last year appear to have been overblown, as more recent news from other VCT managers suggests that the figure for cash raised will come somewhere close to last year’s figure of £429m.
Risk reward – raising capital to grow
It was the tax relief that lay behind the enthusiasm for renewables and which ultimately proved to be too successful in drawing in investors’ cash. Ian Battersby, business development director at SME specialists Seneca Partners, says the problems the government had with renewables was foreseeable. “It’s not difficult to see why HMRC have removed them from eligibility criteria as their clear direction with EIS reliefs is to ensure they are targeted at companies seeking to raise capital in order to grow,” he says.
Nervousness regarding how investors should view tax-advantaged investment is common to the manager and commentators as much as it is to the government and the tax authorities. “HMRC are clear in not wanting to see EIS used as a tax mitigation tool,” says Battersby. “The tax reliefs are there for investors who are willing to take the heightened risk of providing capital to help companies to grow.”
“We do not focus on the tax breaks,” says Hutchinson from Unicorn. “If you look at a fund like ours with £130m of assets today it has all the hallmarks of a mainstream UK smaller companies investment trust, it just happens to be a VCT with all the tax advantages associated with that. But it’s sold on its investment merit not on the tax advantages.”
A more settled outlook
The managers and advisors also agreed that the sector can likely enjoy a period of stability for the foreseeable future. “The industry will need some time to adapt to the latest changes and so we’d be surprised if further significant changes were proposed in the short- to medium-term,” says Sarah Wadham, director general of the EIS Association. “Both the EIS and VCT industry continue to engage with the Treasury, HMRC and policymakers both in the in the UK and the EU to ensure the schemes work as effectively as possible.”
About the report
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.
* The new rules announced in the summer budget mean that companies that receive tax-efficient investment must in most cases be less than seven years’ old, can receive no more than £12m from tax-advantaged sources in their lifetime, and funds can no longer back management buyouts (MBOs) and some other asset-backed deals.
NOTES TO EDITORS:
LGBR Capital, which was founded in 2012, works in partnership with experienced, quality investment managers to develop and distribute financial products to investment intermediaries in the UK. Our tax division brings advisers a range of solutions from investment managers at the forefront of the sector, with capability covering VCT, EIS, SEIS, BPR and IHT.
The report’s author, Scott Longley, has been a journalist covering the personal finance industry and other industry sectors since the early noughties. He has worked for a number of publications including Bloomberg Money and Investment Week and writes regularly on the tax-advantaged investment sector.