Tax Year End Webinar – What did we learn?

Summary of the Deepbridge Explore Webinar 

Simon Tutton, Regional Director (South West England and South Wales), Deepbridge Capital

The end of the tax year is often viewed as a busy and, quite frankly, stressful time for financial advisers and anyone dealing with the end of the tax year deadline.  Being engaged in continuous and careful thought probably isn’t how people would sum up their state of mind!  Although, that is probably what they are doing.  The stress belies the continuous job of creating, communicating, implementing and managing investment strategies and financial plans over the course of a year - year in, year out.    

One cannot be an expert on everything or hold every issue for consideration in one’s mind constantly, so it helps to have experts on hand to provide reminders and guidance.  And experts in tax advantaged investments is certainly what James Ramsay and Hugh Rogers certainly are, being senior experts for independent review companies MJ Hudson Allenbridge and Tax Efficient Review respectively.  

So what key points were raised?    
The questions kicked off with James offering an analysis of the differences between EIS and VCT, which are often grouped together being invested in similar stage companies and offering the same 30% up front tax relief that is where the similarity ends.  He contended that VCTs should probably not be viewed as lower risk than EIS even if the inevitable company failures are masked from the direct view of the investor.  Liquidity is better but, if in a forced situation, you could be paying a large amount (potentially up to 30%) in order to come out of an investment.  Hugh summarised the main differences; if you want income and potentially wider-diversification, consider a VCT, but if you want capital growth and the cocktail of extra tax reliefs such as business relief, consider an EIS.   

The topic moved on to what has changed in the world of EIS, VCT and venture capital in general.  The Patient Capital Review was cited by both as a sea-change moment, but for the better.  Gone are the asset-backed offers that people used simply to access tax relief.  The result of this is that managers are now focused on growth (if they weren’t already before) with the associated benefit that if there are losses in a portfolio the growth can make that up and more.  With asset-backed propositions, losses often had a detrimental impact that couldn’t be recovered from easily.  Investors can now put the medicinal brandies away! 

Never far from people’s minds, Covid entered the conversation, but for the reason that the pandemic has possibly had a beneficial affect on the venture capital scene.  Alongside the other Ps of Pensions (and the reductions to both annual and lifetime allowances) and Performance (that EIS investments are now showing pleasing realised and unrealised returns across the market) there has been a structural uptick in interest and shift in mindset to investing in venture capital that shows no sign of going away.  

With what James viewed as a positive risk: return ratio, EIS is now being viewed as a diversifier in its own right, with unquoted investments potentially providing diversification from listed markets where most investors typically hold the bulk of their assets.  Hugh raised the point that, like with pension and ISA investing, the most successful investors are the ones who have used EIS and VCT on a continuous basis.  Unlike martinis, where two is too many but three isn’t enough, diversification is important, both by manager and sector.  

Continuing the cocktail analogy, cocktails tend to be expensive and similarly, fees in the venture capital world tend to be high.  Counter-intuitively (in these days of ultra-low fee passive funds and ETFs) both saw this as a good thing.  In this sector, both as from the perspective of an investee company seeking funds and an investor putting capital in, you want your investment manager to be doing an awful lot of work.  And like mixing your own drinks rather than having an experienced bartender do it, there are cheaper ways of both investing and raising capital but those typically don’t provide the reassurance of an investment manager and the value they can add or their network of contacts.  Although both of the panel caveated that you must also keep an eye on unrealised return progress and exits that can validate those paper returns.    

Both highlighted improvements that could be made to EIS, SEIS and VCT – raised investment limits, more transparency, particularly around valuations in business relief and to have the income tax relief of EIS become upfront rather than being delayed.  However, even as they stand, the view was expressed that, certainly for an adviser’s best clients, these types of investments should be being normalised.   

In summary, when considering how to incorporate tax advantaged investments into clients’ portfolios, the thought process is like making a cocktail – spend time getting the right mix, look carefully for high quality ingredients and ideally find someone who knows what they are doing to make it for you!  Is it 5 o’clock yet?  

EIS investments are both illiquid and high risk, it may be difficult to sell shares because of the lack of an existing market. Investments are not suitable for all investors and investors should not consider investing unless they can afford the full loss of their investment.  Prospective investors should read the full risks stated in the respective product Information Memorandum.  Prospective investors should take appropriate professional advice (including legal, financial and tax advice) before making any investment decision.

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