Industry experts have flagged that demand for the attractive tax relief offered by venture capital trusts and enterprise investment schemes is outstripping the supply of quality products.
Mattioli Woods’ sales and marketing director Murray Smith said concerns the government may eventually introduce a plan mooted pre-Budget to cut higher-rate tax relief and annual allowances on pensions, is fuelling demand for alternative investments with tax benefits.
The government had considered cutting the annual allowance from £40,000 a year to £10,000, which Mr Smith said would not be sufficient for a high earner to accrue a “sensible pension pot”, meaning that other avenues will be considered such as that of VCTs, EIS and SEIS.
“I am a great believer that the ‘tax tail’ should not be allowed to ‘wag the investment dog’ and getting all starry eyed about tax reliefs can be dangerous,” stated Mr Smith.
“That said, for those high earning individuals, it would be equally inappropriate to dismiss VCT, EIS, and SEIS planning as all being too high risk and therefore in the too difficult box.”
But Mr Smith said rising demand for these alternative investments is not being met by quality products in the market.
“At present it is quite difficult to find appropriate VCT and EIS-led investments, as for example, the VCT houses at present are not looking to raise substantial sums in investments that are often taken up very quickly.
“If we do see demand for VCT and EIS fuelled by contribution changes for high earners, this could lead to an increased supply of opportunities, which may or may not be particularly worthy, potentially serving to overly increase the risk.”
Therefore, Mr Smith said there is a ‘buyer beware’ element which underlines the need for detailed financial advice before investing.
Andrew Aldridge, head of marketing at EIS firm Deepbridge Capital, agreed the market capacity concerns were valid. “We’ve already heard a number of advisers saying providers are stating they can’t guarantee that funds would be deployed this year, which is far from reassuring for advisers.
“This is a concern and I would suggest that there is increased demand but also pipelines of deals perhaps aren’t strong enough.”
Mr Aldridge said there could be a number of reasons for the dearth of quality investments, including recent government changes around the qualification criteria for companies seeking EIS status, forcing some providers having to revisit their investment strategy.
“From our perspective we wouldn’t want to have too many companies in a proposition and not be able to fund them properly, but at the same time we need to have enough capacity to satisfy increasing demand.
“As much as lack of capacity could be problematic, having underfunded companies within schemes could be as equally detrimental to clients, if that underfunding adversely affects the growth and exit potential.”
Colin Rodger, director at Alexander Sloan Financial Planning, said that the tax reliefs on EIS, SEIS and VCTs are very attractive, but that these are very different investments to pension plans.
“There are liquidity and exit issues to consider, as well as the government’s propensity to intervene.
“Many clients are wary after their experience for example with Business Premises Renovation Allowances schemes where they have found themselves subject to HMRC tax investigations years after they initially invested.”
ruth.gillbe@ft.com
