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EIS appeal: investment plus tax a winning combo


  • By Jason Stockwell

Investing in EIS is no longer just about the tax breaks, with advisers and clients waking up to the investment appeal as well as the tax treatment


The appeal of private investment is growing and investors are now seeking out tax-efficient investments like EIS for the investment opportunities as much as the tax boost.

Paul Wilson, Chairman of IFA Magazine Publications and former wealth manager, says the appeal of EIS is changing, although many advisers and clients still focus on the tax breaks on offer.

“Traditionally it was a tax-driven investment,” he says. “You looked at the number, and it was all about asset backing and minimising risk. My own experience was you spent 50 minutes on tax and numbers, five minutes on the [investment] proposition,”

However, this way of thinking is now outmoded and he adds that “the focus is very much on getting the investment right and the tax breaks are there to support that”, especially as the government – which sets the tax breaks – essentially becomes a “co-investor” so “everything focuses on the proposition”.

Private investment and angel investing was a niche industry but the advent of crowdfunding, the ability to invest online, and appealing returns has brought it fully into the mainstream. Crowdfunding platforms raised £218 million in 217, according to The Deal: Equity Investment in the UK 2017 by Beauhurst, showing the momentum for alternative finance and alternative investments.

Andrew Aldridge, Head of Marketing at EIS provider Deepbridge Capital, says crowdfunding has made investment more accessible.

“Early-stage investment opportunities are more accessible now through crowdfunding,” he says. “Investors should be very cautious when it comes to crowdfunding but it has increased awareness of the Enterprise Investment Scheme. We see more business angels, Dragon’s Den on TV, we see more in the media and investors want to be part of that journey.

“We’re seeing more high-net-worth individuals who have money ‘to play with’, who want to invest via EIS. They want to invest back into UK business. We invest in technology and life sciences – they’re exciting sectors and investors want to share in the growth potential.”

Wilson says that crowdfunding has helped individuals see the potential in private investment but he warns that although crowdfunding “has highlighted the idea” the problem is that “people have no idea what they’re buying” and there’s “no due diligence”.

Instead he suggests that investors put “5% of [their] portfolio into this high-risk space, and for that you need credible businesses”.

“You need good management and an exit strategy,” said Wilson. “It’s gone from pure numbers, now it’s about investment in [opportunities] that work well.”

Robert Clark, Director of independent financial advice firm Newstead Clark Financial Services, says the tax benefits of EIS is still “a driver, whichever way you look at it”.

“[A client] says ‘I’ve got a big tax bill, what can I do?’, and you mention EIS and VCT…You have to manage expectations [but] that’s 30% of the driver,” he says.

It is unsurprising that tax is still a large part of why clients want to go into EIS, as the tax benefits are fundamentally attractive. Clark says the 30% income tax relief that EIS offers is the right level to encourage investment.

“You have to have 30% [tax relief], if it was 15% nobody would invest,” he says. “After charges, it is only 20%.”

He says that EIS offers clients the chance to invest in the “safe end of the high risk” investment spectrum. However, he stays away from Seed EIS (SEIS), which offers income tax relief of 50% but requires investors to put their money into even higher-risk and earlier-stage companies than EIS does.

“I felt [SEIS] was too risky,” says Clark. “When I fill in an attitude to risk form, a vast number [of clients] are happier with the 30% than the 50% [relief].

“If I’ve got someone with £3 million to invest, they’d put £100,000 into a SEIS.”

It isn’t just clients and advisers that still see tax as the main driver for EIS investment, providers are well aware of the appeal of the tax relief.

“The tax reliefs are usually the driver,” says Aldridge. “Ultimately, that’s why the government offers such tax incentives.”

Despite this, he says that the market is changing and there is a greater shift to the investment behind the tax relief.

“The market has changed over the last five to 10 years,” he says. “Five years ago it was a black box approach [to investing]. You’d invest with a big, well-known brand, [the money] would go into a black box, and you’d find that you’d get contract notes or tax certificates to tell you where your money has gone.

“We were shocked people weren’t asking more questions.”

He said Deepbridge Capital makes sure it talks to both advisers and clients about the types of companies it invests in.

“Yes, tax reliefs might be the driver but once you have the tax reliefs, it’s about understanding where the investment is going and what it is doing,” says Aldridge.

As more investors look beyond the tax treatment to the underlying investment, it is unsurprising that they are becoming more involved in picking sectors and projects that they want to make a personal difference in, and the same can be said for regional preferences.

Tony Stott, Chief Executive of Midven, which invests in earlystage, technology and SME companies primarily based in the West Midlands, says there was a demand-supply gap in the West Midlands when it came to investment opportunities.

“Part of the reason for doing this is that in the West Midlands area, there’s a gap in the market for people investing in EIS,” he says.

Stott says that HM Revenue & Customs (HMRC) figures reveal that there is a “demand for capital, and there are a lot of professionals willing to invest in these funds, they just don’t have access to a provider”.

Talon Golding, Co-Founder and Director of private equity firm Novo Ventures based in Birmingham, which describes itself as ‘venture builders’, is also an investor in regional businesses and says that EIS investing works well for the businesses it deals with.

He believes there has been a “change in sentiment” for investors whereby before “EIS opportunities were supported with an asset or had a clear path to exit” but now there is more of a focus on “growth companies with a solid business model and strong management team”.

By investing regionally not only do investors/EIS funds get to put money into growth companies but they also ensure “proximity to the companies” to enable a truly hands on investment strategy to help drive growth across the portfolio and maintain close relationships with founders.

“These companies need a lot of support,” says Golding. “If you’re looking at a geographic region you know inside-out and companies literally on your door-step, it allows a manager to essentially become part of the team”.

David Lovell, Operations Director at GrowthInvest, a platform that provides access to tax efficient investments, says that there is an element of investments being driven by the client and what investments they are drawn to rather than what the adviser says or timeframes.

“There is an element of [being driven by the client] with this type of earlier stage investing, particularly with a regional basis as well,” he says. “Clients want to have a small part of their portfolio in something that is more tangible and that they can feel they’re a part of, and can point to and talk to their friends about.

“It’s not the hobbyist investor, but it is still interesting and exciting to be supporting British, local companies. That’s something we find about the companies we have on our platform. Investors do like getting out and meeting them, visiting them, getting those updates.”

While in the past investors were happy to follow the lead of an adviser and go into EIS for the tax breaks, as the emphasis on the investment behind the EIS grows, there needs to be greater education of the clients to ensure they understand the spirit of EIS investing and their opinions are not skewed by unfavourable headlines around some types of investment.

Richard McCaughan, Chartered Financial Planner at Chartered Financial Solutions, a Leamington Spa-based financial advice firm, says advisers have to be careful about “the potential for [recommendations] coming back on you”.

He notes that some large providers – that seem legitimate because of the big brand – have been pulled up in recent years for investments that HMRC was unhappy with. This isn’t the only concern, however, as he emphasises that advisers have a duty of care to their clients to make the right investment decisions for them.

“It’s a compliance thing,” he says. “[It’s} the fear of thinking it might go wrong. It might only be 5% of someone’s money, but it’s still important.”

Wilson says a number of IFAs have stayed away from EIS because they are trying to protect their clients from tax risk but “now EIS is mainstream…we’re trying to protect clients from investment risk”. And advisers have to be discerning about what they put client money into but they must also stay on the ball with the types of investments being offered, because if they’re not clients could be tempted to invest directly.

“If you do due diligence as a single investor, you really need to know what you’re doing. The next thing you need is something that been checked upside down, inside out.

It’s not just about getting the right investment, [clients] need to be schooled as they’re going through – if we don’t advise clients, there’s a risk that they’ll make those investment themselves.”

Novo Venture’s Golding says there has been a “seismic shift” in the attitudes to EIS and the that shift has seen advisers looking to “quality fund managers” rather than just product providers.

“[It is] about understanding the quality of investments rather than just the surety of tax relief,” he says.

“It’s about looking at a manager who can do the due diligence, assess each company, and produce a portfolio against a set mandate.”

In order to ensure their clients are in the right portfolio, being managed by a competent manager, due diligence has to be at the centre of the investment.

Lovell says advisers need to take more care with their due diligence the further up the risk scale they go.

“You want to find out what the client has appetite for, particularly going up the risk scale, there’s a definite need for diversification across portfolios,” he says. “If someone’s really keen on technology, and someone phones us up about technology fund managers, [you] want to encourage them to look at or five and allocate to the funds.

“Where the risk goes up, that can be offset by proper diversification.”

Local-focused funds are good for the local economy and can be good for investors but there needs to be awareness that hyper-local investment can leave investors exposed.

“Definitely go into a local fund,” says Lovell. “But if that’s your only investment, that’s a lot of focus on the West Midlands economy [for example]. That’s more and more the conversation we’re having with advisers.”

Whatever the risk scale of the investor and their sectoral or geographic preference, it is clear that advisers need to educate themselves and their clients about the tax and investment opportunities open to them via EIS.

Wilson says that as EIS hits the mainstream “clients want and need it” and “if [an adviser is] not providing advice, [their clients] will find someone who is”.

Lovell agrees that more advisers should be considering EIS and letting their clients know about this tax-efficient investment.

“More people and investors should be doing EIS than are in the marketplace at the moment,” he says. “There are only 30,000 on an annual basis, and there are a whole load [of people] sitting [in] the higher income brackets that should focus on that.”

For those who are worried about the risks of these investments, Lovell says this can be offset by diversification and the “growing infrastructure around this market” is making diversification easier so “there’s a lot of information out there [and] advisers should get stuck in”.

Philip Thompson, Business Development Manager at Deepbridge Capital, says even IFAs who have been advising clients for a long time need to update their knowledge on this fast-paced investment sector.

Whatever the risk scale of the investor and their sectoral or geographic preference, it is clear that advisers need to educate themselves and their clients about the tax and investment opportunities open to them via EIS

He says advisers should “not be afraid of it” and actively engage to “understand it more”.

“It doesn’t matter how long you’ve been an IFA, you have to make sure you’re looking at the whole of market for them,” says Thompson.

Advisers also need to make themselves aware of the finer details around investing in EIS, which do differ from standard fund investment in terms of payouts and timings.

Aldridge, also of Deepbridge Capital, says that advisers need to understand the fund managers and “how quickly they deploy funds”.

“Once you’ve established credibility and quality, advisers should be looking at how quickly funds are deployed. Some managers state that it could be up to two years before they deploy funds, so that’s an extra two years added your exit prospective exit timescale, as well as a delay to claiming any potential tax reliefs,” he says.

By understanding the deployment and timescales of EIS investing, advisers can ensure they give clients the full picture on how long they will be invested for and when they are likely to get their money back.

McCaughlan says he would like to see EIS portfolios pay out monthly instalments, a move that would be helpful to older investors who are potentially using their investment income to live on.

“If there was any way that monthly money could be paid, that would be reat, so £5,000 a month rather than £60,000 a t the end of the year means better advice and more considered investment,” he says.

Lovell says GrowthInvest is currently looking into monthly payments to see how viable it is.

“We’re speaking to a couple of payroll companies about exactly that,” he says. “So pension and EIS [income] could come out at the same time. There’s a big drive in the market [and] there’s no reason there should be a focus on first quarter as a time for investment.”

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