InvestmentsNov 25 2013

Why are advisers shunning EIS?

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When advising their clients on possible ways to mitigate inheritance tax (IHT), only 1.5 per cent of financial advisers prefer Enterprise Investment Schemes (EIS), exclusive Financial Times Publishing research reveals.

In spite of it taking a full seven years to be exempt from IHT liabilities, the most popular products, at 72.2 per cent, were ‘trusts and discounted trusts’. This level of popularity is perhaps not surprising given the current financial climate and the inability of many to sacrifice the potential for income by gifting away monetary assets.

But then why would advisers shun the EIS, which offers capital growth and has attractive tax benefits?

Originally introduced under John Major’s conservative government in 1994, the IHT benefits for the EIS fall under Business Property Relief (BPR), which provides 100 per cent exemption from the tax once the holding has passed the two-year mark.

Susan McDonald, chairman of EIS provider Calculus Capital, explains: “With shrinking pension protections, the industry is becoming more aware of EIS. It is, after all, a compelling option with benefits including net loss relief up to 61.5 per cent, inheritance, capital gains and income tax relief, and also the ability to invest up to £1m a year.

“However, the survey shows we still have some way to go as an industry to educate about all the advantages EIS can offer.”

Ms McDonald urges those yet to “fully grasp the benefits of EIS” to investigate further, adding: “The growth in EIS funds in the past couple of years shows this is becoming a mainstream investment vehicle.

“Personally, I can’t think of a government approved scheme that offers the sophisticated investor as many tax benefits, as well as the opportunity of considerable upside returns from investing in some of Britain’s most dynamic growing companies.”

But according to Jonathan Gain, chief executive officer at Stellar Asset Management, realistically, the market that EIS is appropriate for is relatively small.

“It is for people that understand there is a high degree of risk and while you may be able to get money out of the IHT estate within two years, for those people that are older and starting to think about IHT mitigation, common sense dictates that you don’t start taking on extra risk. The mantra is that as you get older you move closer and closer to cash,” he says.

“Going into higher risk equities that are unquoted, unlisted and are really tiny makes EIS a difficult choice for an overwhelming majority.

“However, for those clients who are elderly with substantial estates and have got income from pensions in excess of their needs, then a diversified EIS portfolio can be an ideal tool. But it is a very small market for which it would be appropriate for and that is fairly reflected in this survey. I wouldn’t expect it to be higher and I would be worried if it was.”

Mr Gain does, however, agree with the sentiment that there is a general lack of awareness surrounding the benefits of EIS for both a general investment and tax-mitigation tool.

“Trusts and discounted gift trusts are an obvious option and overshadow the other alternatives, he says.

“The difference in everybody’s mind to the alternatives to trust is a trade off between the time period and the risk involved.”

Phil Roden, director and co-founder of discount broker Clubfinance – one of the biggest third-party distributors of EIS in the UK – adds that it is important that EIS providers are more supportive to the adviser market in terms of advice and education on these more sophisticated products.

But he does identify the opportunity for “added value” to the adviser business.

He explains: “Once the trust is set up you can pretty much leave it, but the EIS arrangement is an investment and therefore structured to return the proceeds to investors.

“It is a particular area where advisers are able to add value by monitoring how the investment is doing and then through the recommendation of new products.

“Obviously, given the emphasis on providing ongoing advice, that shouldn’t be a stumbling block.”

Jenny Lowe is features editor at Investment Adviser