Advisers are still backing Enterprise Investment Schemes despite previous concerns the taxman’s rule changes could stifle the market, research has shown.
The findings, published by provider Great Point Investments today (November 19), showed more than half (56 per cent) of advisers polled said the number of clients using the schemes had stayed the same over the past year while 67 per cent expected to see the same level of interest in the future.
On top of this, one in 10 thought the overall use of EIS would increase over time.
Investors in EIS qualifying companies can receive a tax break of as much as 50 per cent of the amount invested, with any income and capital gains exempt from tax.
But changes introduced in the 2017 budget saw then chancellor Philip Hammond tighten the rules around the types of companies that can be invested in through the schemes.
In particular Mr Hammond sought to encourage investment into knowledge-based companies, rather than asset-backed businesses.
Asset-backed businesses include companies such as bars or restaurants, where tax relief is gained, but the investor owns the property, and so the risk is lower.
HMRC was worried that too many EIS investments were made with capital preservation in mind, when the aim of the EIS tax breaks was to incentivise investment into risk assets.
However, while advisers were not put off the investments by the changes, there are signs they have adapted the way they use EISs.
Great Point found half of the 50 independent financial advisers polled between September and November said they had been more inclined to look for a proven track record with established EIS funds, rather than new arrivals to the market.
This was followed by an increased focus on diversification at both manager and asset class level (31 per cent).
Advisers also said the government’s changes had made them less inclined to recommend single company investments (22 per cent) yet more inclined to recommend EIS funds (14 per cent).
Despite continued adviser interest the EIS market is shrinking, as HMRC data showed the amount of tax relief the taxman expected to be granted to EIS and SEIS investors in the current tax year was £775m, considerably less than the £830m granted last year.
According to the advisers surveyed, the typical investment made into EIS over the past year was £20,000 to £100,000.
According to Dan Perkins, managing director at Great Point Investments, this demonstrated the world of early stage venture capital investing was “not just the preserve of the super wealthy”.
The findings also showed most IFAs had roughly 15 per cent of their clients invested in EIS.
Mr Perkins said: “This survey clearly shows that EIS continues to be an important part of the wealth planning mix for advisers and their clients.
“The rule changes have changed the risk profile of EIS and this has brought a sharper focus on investing in genuine growth businesses.”
Tom Sparke, investment manager at GDIM, said advisers have embraced EIS vehicles as a valuable tool in the financial planning process, adding the industry had seen some “huge successes” from investment point-of-view.
He also thought it was a good thing the new rules have not turned away advisers as it suggested they were using the schemes for the “right reasons” and “taking a long-term view”.
Tilney’s director of communications, Jason Hollands, said advisers primarily used the schemes as part of an inheritance tax mitigation strategy and the deferral of capital gains tax liability.
He said: “These features of EIS remain relevant given the strength of asset prices and the long-standing freeze on the inheritance tax nil rate band.
“However, advisers clearly need to tread ever more carefully when recommending EIS to clients and make sure they have done thorough due diligence on their EIS panel, as well as rigorously assessed the suitability of EIS for their clients.”
imogen.tew@ft.com
What do you think about the issues raised by this story? Email us on fa.letters@ft.com to let us know.
