One question advisers need to consider at this time of year, says Dermot Campbell, is whether a client really needs to invest in EIS and VCTs by 5 April or are they in a position to take a step back from the stampede?
Enterprise Investment Schemes (EIS), Seed EIS (SEIS) and venture capital trusts (VCTs) are flavour of the month at this time of year. Over the last three years, we have found that, on average, 55% of all investments in such vehicles take place during the last three months of the tax year.
The big question is, however, how urgent is it to get invested? In other words, does a client need to do so by the end of the tax year or can they take a step back from the stampede?
People do their tax planning at the beginning of the calendar year for different reasons. First, people need to pay their tax by 31 January. Second, for some, it is only at the end of the year they know how much tax they are likely to have to pay. Third, it is only now some receive bonuses, giving them the capital to invest.
Notwithstanding this, there is also the deadline of getting the investment counted in a particular tax year if the client is carrying back the tax relief into the previous year, and to do this they must have money invested on or before 5 April.
With VCTs, they can only offset the investment against tax in the current year. By comparison, with EIS and SEIS, they can have their investment treated as though it was made in the previous tax year by carrying back for income tax purposes (with SEIS, carry back also applies to capital gains).
From an investment perspective, with EIS and SEIS you invest directly into the underlying companies. This means that, if a client invests right at the end of the tax year, they will tend to end up with whatever is available. This is where considered planning is paramount.
With VCTs, the client's money goes into a fund and, once the fund starts investing, the manager has up to three years to invest at least 70% in qualifying companies. This means there is less of an issue in leaving an investment to the last minute.
In terms of the investment cycle, companies know the last few days of the tax year are prime for raising capital. This drives the cycle, whereby investment deals begin to emerge in mid-September/October and build up to a peak in February/March before trailing off to reaching a low point mid-July … before the cycle begins again.
What this means is it can take a while to get fully invested if money is invested during the summer months. The significant positive is that this gives plenty of time for managers to pick the best investments as there is less time pressure.
For clients who had a spike in income tax last year, they will need to invest in an EIS or SEIS before the end of the tax year. Equally, if they want to use VCTs, they will have to hurry because they may start to run out of capacity and there is no carry back.
For investors with a capital gain, there is another time consideration. To get the best out of an EIS, clients ideally want to optimise their tax reliefs, claiming the maximum income tax relief as well as capital gains tax (CGT) deferral. As CGT often relates to big-ticket liquidity events - for example, the sale of a business, or realising gains in an equity portfolio - investors will probably want to carry back to maximise the previous year's income tax.
The good news is clients have three years from the date of the gain to reinvest and claim CGT deferral, allowing them to spread the income tax relief over several years. With SEIS, it should be noted, you can only access CGT reinvestment relief in the current or previous year.
From an investment perspective, the secret is to put client money with your selected investment managers and allow them to invest in a measured way over a period of time, catching some of the tax year-end rush, but leaving some in the pool so your clients can enjoy the early-bird opportunities at the start of the next investment cycle.
To sum up, think how much a client must invest before the tax year-end in light of their tax position and ring-fence that money for investment in funds you are confident will invest quickly. Place the remainder into investments that meet the client's investment needs, not their tax needs. Timing is important for both - don't leave it too late and remember the ‘cycle' begins again in September …
Dermot Campbell is chief executive of Kuber Ventures
Retired in 2014
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