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.
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.