Industry experts have told FTAdviser that tax-efficient schemes such as venture capital trusts and enterprise investment schemes are set to be benefit from the lifetime and annual allowance cut in pension contributions.
Proposals to lower the lifetime allowance to £1m from £1.25m were announced in the last coalition government’s budget and are set to come in next April. The Conservatives also want to recede the annual allowance for those who earn £150,000 or more.
Speaking to FTAdviser, Andrew Aldridge, head of marketing at provider Deepbridge Capital, said that advisers are now looking at EIS as an option for clients who will be affected by the lifetime allowance cut.
Richard Cook, chief executive at Blackfinch Investments, agreed, stating that the provider has “certainly noticed” an increase in the number of advisers looking at other tax efficient investments which may provide an alternative.
“EIS falls within this category and, for the right client, it can provide an alternative solution, so it is natural that this will provide an increase in demand.
“It is important for investors to understand the risks and return opportunities involved with any EIS investment and to analyse the underlying business model, as well as its management team.”
Sarah Wadham, director general of the EIS Association, highlighted that while she expects there to be an increase in people using EIS, due to the cuts, EIS are generally more risky than pensions.
“EIS would appeal to higher rate tax payers as the lifetime allowance is quite low for them.
“People are looking at other ways to invest in tax efficient ways to shelter their money. But it is not just about tax breaks; EISs support the economy.”
She added that at the end of the last tax year, EIS investment had reached £1.5bn “which is huge”.
“We are seeing more interest from wealth managers and IFAs - particularly from tax planning purposes and to diversify.”
Ian Sayers, chief executive of the Association of Investment Companies, added that while these investments - EIS and VCTs - are high risk, they invest in small companies which could grow into household names in the future, helping to create jobs and economic growth.
“Furthermore, the government offers generous tax breaks to compensate for the risk involved, making them a tax efficient way to invest.
“With the pension freedoms now a reality, the importance of tax planning for those in or near retirement has never been more important. The ongoing changes to the lifetime and annual allowances for pension contributions is also leading to increased demand for VCTs.”
Dan Kiernan, research director at Intelligent Partnership, added that the firm has heard “anecdotally” that more people are attracted to EIS due to the lifetime allowance cuts, but emphasised at this point it does not have evidence to support this.
donia.o’loughlin@ft.com
