In 2021, it is still remarkable when you hear financial advisers dismissing investment opportunities out of hand. My guesstimate, based on a decade of experience in the financial services sector, is that approximately 30% of advisers in the UK will consider Enterprise Investment Scheme funds as part of their financial planning. So why are so many advisers dismissing such opportunities and what are they missing out on?
By Andrew Aldridge, Partner at Deepbridge Capital
One of the potential misnomers is that EIS, and other tax efficient investments such as VCTs and Business Relief propositions, are only for the mega wealthy. With the pension LTA and tapered annual allowances now affecting many more clients than just ‘the wealthy,’ there is perhaps now a genuine need to consider other tax-efficient structures for a broader range of clients. With most EIS funds accepting investments as little as ten thousand pounds, there are opportunities for advisers to provide investors with tax-free growth away from pensions without having to commit unwieldy amounts – of course there are a myriad of other tax reliefs with EIS qualifying investments as well, not least 30% income tax relief, CGT deferral, inheritance tax exemption after just two years and loss relief in case everything does go wrong.
There really is no-greater Government giveaway to investors.
Let’s take a client who invests £12,000 each year into EIS propositions for five years. If that provides them with diversification across approximately three companies each year, then after five years they will have amassed a private equity portfolio of fifteen growth-focused companies. Such a portfolio would be minimally correlated to main market fluctuations and could also form part of wider inheritance tax planning. In fact, to be profitable this portfolio could require as few as four of the companies achieving reasonable growth. Any other successes in the portfolio are all profit and, importantly, tax-free growth (subject to EIS rules, such as assets being held for a minimum of three years).
One of the additional concerns from advisers is the risk profile of such products. Such funds should absolutely be considered as high risk and illiquid. However, within a well-balanced and diversified portfolio, there could be opportunities to maintain an appropriate portfolio risk profile whilst including EIS opportunities to create a private equity portfolio. Of course, such a portfolio could also benefit from the downside protections of tax and loss reliefs. For example, tweaking the balance of a portfolio to include more ‘lower risk’ products, such as bonds, could allow for a small proportion of high risk EIS stocks which provide the potential for significant growth whilst maintaining the overall portfolio risk profile.
So, EIS isn’t just for the super wealthy and is also not just for the world’s risk-takers. EIS could form part of more investors’ portfolios. So, why else are some advisers still refusing to look at such propositions? There are various hypotheses but, in reality, it predominately comes down to habit and education. There have been various changes to the sector over the five years which has meant those advisers used to the historic ‘asset-backed EIS’ funds are perhaps taking time to come to terms with the modern focus of EIS being to support growth-focused companies which are perhaps perceived as being higher risk.
The good news for advisers is that there has probably never been more EIS education available, with providers (including Deepbridge), the main compliance service providers and networks, specialist education providers such as Intelligent Partnership and our trade body the Enterprise Investment Scheme Association (EISA) all providing excellent educational materials and courses.
The thing to remember is the UK Government offers the Enterprise Investment Scheme to UK investors in order to encourage them to support growth-focused companies which are seeking to create jobs and create businesses which will be the economic backbone of the country. As the economy seeks to recover post-pandemic then EIS has never been more important and should be at the forefront of consideration by financial advisers and investors.
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