The latest shift saw the Treasury announce that EIS rules would pivot to ensure the focus was on “knowledge-intensive companies”.
It follows previous concern from regulators that EISs were too focused on “capital preservation”, whereby investments were made with the aim of simply not losing money, and the tax breaks alone providing the return on investment for the underlying client.
Alex Davies, who runs investment specialist Wealth Club, says: “Last year about half of the money that went into EIS funds was of an asset-backed/capital-preservation nature, such as pubs, wedding venues, storage businesses, films, and so on.
“The new rules mean money has to go into far more growth-orientated deals. These are more risky than the old-style deals, but do offer the potential for much higher returns.
“With asset-backed investments, everything was relatively predictable. You don’t expect anything to go massively wrong or spectacularly well. In other words, the best manager will not perform much differently from an OK manager. With early-stage investments it’s a completely different story.
“Things can and do go massively wrong or spectacularly well. And the role of the fund manager or fund management team is absolutely crucial.”
The rules governing the VCT sector have been altered in similar fashion, tilting the focus towards investments that involve placing capital at risk, rather than asset-backed businesses.
More change may be possible on this front: FTAdviser reported in early November that Treasury head of investment tax Donald Stark said the government would be “viewing, with interest, whether the types of investments being made in 2018 and beyond are different from those that have been done in the past”.
The question now is whether the regulatory shifts will have any impact on interest in the sector – and managers’ ability to invest the money that does come in – or whether the wave of excess pensions money will continue.
A banner year
VCT funds raised the second-largest amount ever from investors in the 2017-18 tax year, as Chart 1 shows. The final figure was in excess of £700m, driven by investors having maxed out their pension allowances and a rush to get in ahead of possible changes regarding the eligibility of underlying investments.
Richard Hoskins, co-founder of consultancy Kin Capital, says “there are very few VCT firms that have not had to change their spots” to react to the rule changes introduced in recent years.