4 minute read
THE CASE FOR YEAR-ROUND EIS INVESTING
Vala Capital’s Debbie Mahanta highlights the reasons why leaving your clients’ EIS investments to the last moments of the tax year is in nobody’s best interests
For years now the EIS investment market has been heavily cyclical. Many EIS providers raise a large proportion of their annual funds in the first quarter, often concentrated into the last four or five weeks of the tax year, when all things tax-related are at the top of the client agenda. Until recently, the urgency was also driven by a large number of EIS investment opportunities that could promise clients who subscribed in February or March that their EIS shares would be purchased before 5th April. This approach makes it possible to use the tax reliefs to claw back some of the tax bill paid in January.
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THE NEW REALITY
The 2018 introduction to the EIS rules of the ‘risk-tocapital’ condition changed the market considerably, but investor habits have not necessarily caught up to the new reality. The rules have put a stop to many ‘asset-backed’ EISs, such as those investing into renewable energy. Because those products were more like project finance than venture capital investing, the managers could easily deploy client funds to a tight deadline at the tax year-end. The absence of these products from the market means that investors who want to write a cheque after 31st January for investment into shares by 5th April are now left with fewer credible choices. Furthermore, the EIS managers who can meet this urgent demand might have limited capacity to fill, creating a risk that a client misses out completely. As such, there is a good argument for encouraging clients to take the stress out of EIS investing, by thinking about it earlier in the year. With clients who like to make ISA and pension contributions at the start of a new tax year, there is a natural opportunity to bring EIS investments into the planning conversation. Most EIS portfolio products will deploy a client’s subscription into EIS-qualifying shares over a period of around one year. If a client invests in an EIS portfolio service in April or May, there is a good chance that most or all of their share purchases will take place before the next tax year-end rolls around. As such, they could achieve the same investment objectives as a client who looks for a quick fix at the end of the tax-year, but with the added benefits of being able to choose from moreor-less every EIS product on the market. They will avoid the risk of missing out on their preferred product due to limited capacity. And they will have the luxury of choosing an EIS based on other preferences, such as their interests in particular industry sectors or investment themes. Some EIS portfolio products (including the Vala EIS Portfolio) invest in tranches, so that an investor’s subscription will be deployed into a diversified portfolio of companies on fixed dates throughout the year. This can be helpful for clients who start thinking about EIS in the summer or autumn, particularly if they would like certainty about the timing of investment into shares, for tax planning reasons. Investing in tranches avoids the complexity of a subscription being invested across more than one tax year. And if a client invests in a tranche that closes by late summer, or even early autumn, they could receive all of their EIS3 certificates in time to claim reliefs when they complete their tax return in January.
THE COVID-19 EFFECT
This tax year, it will be interesting to see what impact the Covid-19 pandemic has on the usual EIS market cycle. Uncertainty tends to create a ‘flight to safety’ among investors. It seems likely that many clients will be sitting on cash and holding off making their EIS investment decisions until we have more clarity. Of course, whilst this might be a natural investor instinct, it is not particularly rational. EIS managers are constantly refining their strategies and their investment choices based on the prevailing market conditions. Proficient EIS managers will not be investing into companies that are either already struggling because of the pandemic, or that are expected to run into difficulties as soon as the full economic impact hits home. In reality, holding off making EIS subscriptions until the first quarter of 2021 may only serve to reduce a client’s investment choices and increase the risk on missing out altogether due to limited capacity. However, old habits die hard. And though there is a reasonable argument that EIS should be for the whole year round, clients and their advisers know the value of a deadline and the 5th April is a pretty good one!
About Debbie Mahanta
Debbie joined the Vala Business Development team in November 2020 with over 20 years' Financial Services experience. She is qualified as a financial planner (DipPFS) in the UK and also has cross border planning experience from her time in Switzerland before moving into sales management and strategic business development roles for UBS, St. James's Place Wealth Management, Guinness Asset Management and Tilney Financial Planning. Debbie has a wealth of experience in tax efficient investments with a focus on EIS and her role is to create and develop relationships with professional advisers and intermediaries across the UK. She sits on the EIS Association Membership & Events committee as well as serving on the STEP City of London Committee for over 8 years.
