Time to start thinking differently about investment timing

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Time to start thinking differently about investment timing

It is time to start thinking differently about investment timing.

Advisers and investors need to rethink how and when they invest in Enterprise Investment Scheme (EIS) opportunities.

EIS rule changes, coupled with increased demand in part fuelled by restrictions on pension savings, mean that leaving EIS investments until the end of the tax year may not cut it anymore. 

Old habits die hard

The market for Enterprise Investment Scheme products has taken on a consistent pattern in recent years.

Demand starts to skyrocket after the 31 January tax return deadline, when advisers and their clients turn their attention to making an EIS investment before 5 April.

By subscribing for EIS shares before the end of the tax year, the EIS income tax relief can be used to reclaim some of the tax that the investor has just paid in relation to the previous tax year. 

For clients who want to use EIS as part of their estate planning strategy, it makes sense to get started as soon as possible.

This last-minute approach to EIS planning was partly cultivated by EISs that invested in renewable energy and other power generating assets. Between 2011 and 2016, there was a substantial supply of this type of EIS, from a number of credible EIS investment managers.

This helped bring EIS into the financial planning mainstream. But it also meant investors learned the habit of sorting out their EIS investment alongside their SIPP and ISA contributions at the end of the tax year. 

This April, things were very different, because of a series of EIS rule changes that started in 2012. That year, renewable energy companies claiming feed-in tariffs became ineligible for EIS investment.

By 2014, it was no longer possible to invest in any solar power assets through EIS. 2015 saw the withdrawal of EIS investments for all types of renewable energy. Finally, from 6 April 2016 it became impossible to combine EIS investment with any type of power generating activity. And by the start of 2017 no new, large-scale EIS opportunities had emerged to fill that void. 

This reduction in supply was almost certainly exacerbated by increased demand. With a greatly reduced lifetime pension allowance and annual pension contributions reduced to £40,000 (falling to £10,000 for high earners), a greater number of wealthy individuals were looking for additional tax-efficient investment options, including VCTs and EISs. 

As a result, EISs with one-off share purchase dates on the right side of the tax year-end, many of which had limited capacity, filled up quickly. 

Time for a change

Advisers and their clients may need to take a different approach to EIS investing in the 2017/18 tax year. 

Some investors could opt to invest in diversified portfolio EISs. Run by professional venture capital managers, these EISs spread investors’ subscriptions across a number of small, early-stage businesses.

They are sometimes open all year-round, with no maximum fundraising limit, which can help the client avoid capacity problems. 

This type of EIS deploys capital in multiple transactions over a variable period of time, usually a year or more, rather than subscribing for shares on a single, predetermined date.

This means subscribing to a diversified EIS product in February or March is not going to help the client to neatly square away their EIS share subscriptions before the tax year-end. Despite this, demand for the Oxford Capital Growth EIS, our own diversified EIS product, seems to be on the rise.

We saw subscriptions increase by more than 35 per cent in the first quarter of 2017, compared to the same period last year.

There is little prospect of a new, large-scale, ‘lower risk’ EIS opportunity emerging to replace solar and energy EISs this tax year. It is more likely that the EIS market will be fragmented. New offers, with modest capacity, will pop up from time-to-time and are likely to fill quickly.

Clients who need to be sure of completing their EIS investments before the tax year end could therefore miss out if they wait until the first quarter of 2018.

Instead, advisers may need to survey the EIS market carefully all year, and help their clients to act quickly when suitable opportunities emerge. 

Investing sooner rather than later has other advantages too. An investor who subscribes to an EIS like our Media EIS today, could feasibly have their EIS3 certificates in their hands before the end of this calendar year.

So rather than paying income tax in January 2018 then reclaiming it from HMRC later that year, they could potentially make the EIS income tax relief claim on the face of their tax return and avoid paying the tax in the first place.

Even if an investor opts for venture capital portfolio EIS, they could still expect to have a good number of their EIS3 certificates by next January, if they subscribe now.

Furthermore, EIS investments can qualify for relief from Inheritance Tax relief, if held for two years and still held at death.

As such, for clients who want to use EIS as part of their estate planning strategy, it makes sense to get started as soon as possible. 

It is clear the EIS market has changed, and it is clear investor behaviour will need to change accordingly. 

Will Laws is senior manager at Oxford Capital