Here at Strabens Hall as the end of the tax year approaches, we are once again minded to connect with relevant clients to ensure that they have taken advantage, where possible, of alternative tax-efficient investments.
Whilst the benefits are undeniable (if you pick the right one), our experience is that clients should tread warily in this space particularly as we are seeing a lack of capacity with the better known names.
EIS are notably opaque in structure with many providers either being unwilling or unable to provide clear and simple information to advisers upon request.
Due to pension restrictions, the demand for alternative tax-efficient structures such as EIS, SEIS and VCTs is increasing. Of-course this leads to more providers joining the market to meet this demand. This created a diverse and fragmented market.
As advisers, we cannot claim to be specialists in valuing unquoted, small companies but there are some common-sense questions you should ask before recommending an EIS to a client. In other markets you may be searching for yield, in this market we are searching for quality.
1. Will my clients have a subordinated claim to assets in the event of a wind up?
Many of the underlying companies in so called ‘asset-backed' EIS have already raised money. In many cases this will be debt, if this is the situation, then you can be assured that your client holding ordinary shares will be left holding a lot less in the event of a wind up. What good is focusing on asset-backed schemes when you don't have a full right to the value of those assets?
2. At what stage of growth are the underlying companies?
Pre-and post-profit companies are completely different beasts with completely different risk profiles. Most pre-profit companies fail. A good idea does not necessarily make commercial sense. Can we, or indeed specialist fund managers, claim to know which ideas will succeed and which will fail? Investing in cash generative companies circumvents this issue, the hard work has already been done.
3. Do I understand what the client is investing into?
Once you have sent the application forms and cheque to the provider, the client calls you and asks, so what companies have I invested into? Simply to state, ‘a range of technology companies' or ‘asset-backed companies' is simply not good enough. You must know precisely what the actual underlying companies are, what they do, who their clients are, who the directors are and what experience they have. This can be difficult as with many providers they do not update advisers when investments are being made, however we must ask at the outset, a vague answer demonstrates a weak investment strategy.
4. When will the money be invested?
The most important date for tax relief is when the shares are actually allotted in the underlying companies, not when the paperwork has been received. Some EIS have a 12-18 month timeframe to invest the cash, this converts an already long term investment into an even longer one. If you are looking at carrying back income tax relief, CGT deferral or IHT mitigation then knowing when shares will be allotted is of fundamental importance.
There will be winners and losers in this fragmented market and whilst EIS do not have the same transparency as other mainstream investments, this does not mean that you cannot truly understand what your client is investing into and the risks contained within. By asking common sense questions you can be one of the winners in the EIS playing field.
Christopher Yardley is a Financial Planner at Strabens Hall. He is also a senior member of the firm's alternative investments committee having had several years' experience with EIS and VCT investments at Time Investments a leading alternatives manager.
Christopher can be contacted on:
Direct line: 020 7467 4441
Email: [email protected]