Mixed reaction to EIS and VCT changes

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Everything you need to know about the Autumn Budget

There has been increasing demand for EIS and VCTs following the changes to pensions.

Alex Davies, chief executive of Wealth Club, suggests it has been a good Budget for EIS and VCT investors.

“It rewards entrepreneurial companies and investors who are prepared to take some risk to support British business. While there will be restrictions on some capital preservation-focused products, investments made in the spirit of EIS will benefit burgeoning business and their investors,” he confirms.

“With all the changes to pensions beginning to bite, this type of investment is only going to grow in popularity.”

Any real impact?

But not everyone was quite as enthusiastic.

Svenja Keller, head of wealth planning at Killik & Co, questions how much of an impact doubling the allowance for EIS tax relief will have for the majority of investors. 

“For example, an investor would require an income tax bill of £600,000 in order to receive 30 per cent income tax relief on a £2m investment,” she explains. “This seems excessive when the £1m allowance was already quite generous.

"This increased allowance is also only for ‘knowledge intensive’ firms, whereas all other EIS investments seem to remain at the £1m allowance.

"In terms of capital preservation EIS, they have not reduced the allowance but are introducing a test to ‘prevent low risk capital preservation investments qualifying for the reliefs’. This should reduce, if not eliminate, the availability of lower risk EISs within the market."

Phil Cook, private client partner at Thomas Miller Investment, points out: "The reliefs on income tax, capital gains tax and inheritance tax remain in place and this is an important offset to the high risk nature of EIS, where loss of capital is a realistic outcome.

"Clearly the Treasury wishes to focus investment in specific areas and in high risk/high growth sectors, which is in line with the spirit of the legislation, but it is important investors are rewarded for the risks that they are willing to take in supporting smaller high-risk companies."

He too has his doubts about the increased allowance. He says: "Whether doubling of the EIS allowance for knowledge intensive companies will help raise further capital is questionable as most investments in EIS are relatively small and individuals, with deeper pockets, may already invest £2m using carry back to a previous tax year.

"Only time will tell if this measure actually leads to further investment.”

Muted market

The stockmarket reaction to Mr Hammond’s Budget was muted, to say the least.

Russ Mould, investment director at AJ Bell, observes: “When Mr Hammond stood up the FTSE 100 was trading at 7,448. An hour later, when he had finished, it was almost exactly unchanged.”