Round Table
RISK, MORE REWARD, MORE RESPONSIBILITY MORE
Advisers have increased their due diligence around EIS investments as the risk profile of funds increases and puts more at stake
W
ith a renewed focus on growth within EIS, advisers are having to deal with more risk and are increasingly getting under the bonnet of investments.
‘I think share loss relief is a huge benefit of investing via EIS or SEIS when compared to other tax efficient structures out there such as VCT, especially when investing in high risk, early stage businesses,’ he says.
There is no such thing as a risk-free investment and HM Revenue & Customs (HMRC) was keen to hammer this point home when it changed the rules around EIS to refocus the industry back onto growth companies and ensure tax relief was encouraging investment into UK plc.
‘If you’re focused on growth, which everything should be now, then you’re going to get businesses that lose. When that happens, you want share loss relief to be available to protect your downside whilst enjoying tax free upside on the ones that win.’
This has meant an end to the capital preservation strategies used by some providers that enabled investors to benefit from generous tax relief but also reduce how much risk they took with their money - not exactly within the spirit of EIS. There are some in the industry reviewing their investment portfolios, but advisers will also have some work to do in educating clients about the changes, and the fact that their EIS investments will carry greater risk. Speaking at a GB Investments Magazine round table, Dan Perkins, Managing Director at Great Point Investments, which invests in the media and entertainment industry, says one of the key protections afforded to investors by EIS and SEIS qualifying investments is that of share loss relief. Loss relief allows investors to offset a loss made on an EIS or SEIS qualifying company against their capital gains tax bill or their income tax bill, whichever suits them better.
Tony Catt, Compliance Consultant at TC Compliance Services, says as an EIS matures there should be better statistics available for advisers to use to put losses and successes into context for their clients. This means clients can gain a more rounded picture of their investment, and better understand that in a growth-focused portfolio, some of the investments will fail. ‘As the funds mature you should have better statistics available about the failures and successes that have occurred in the fund, so you should be getting a much better picture of where you are, why a particular company in the portfolio has failed, and what support processes were in place that it didn’t take advantage of,’ he said. ‘All of these things market matures.’
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Catt adds that there will always be ‘good and bad stories’ but greater transparency within the fund means at least clients ‘get the reasons behind those’.
GB Investment Magazine · September 2019
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