Last chance for asset-backed EIS?
Archived article: please remember tax and investment rules and circumstances can change over time. This article reflects our views at the time of publication.
There is growing concern within the industry that the Chancellor may restrict asset-backed EIS investments in his Budget speech on 22 November.
Whilst all EIS investments are higher risk, asset-backed ones are generally considered less risky as they invest in businesses which own assets such as buildings, freeholds or equipment. These could offer some fall-back value for investors if the business itself goes wrong. Popular asset-backed EIS investments include pubs, nurseries and crematoria.
This change is by no means certain, but if you are considering investing in asset-backed EIS this tax year, it may be prudent to act sooner rather than later. It is quite possible if the changes are brought in they could take immediate effect. Asset-backed VCTs might also be affected.
What is happening?
At the beginning of this year the Treasury launched the Patient Capital Review, with the aim to increase the supply of long-term ‘patient’ finance to young, innovative British firms.
This is a positive development. It suggests the government is supportive of investments that create new jobs, new products and benefit the economy as a whole – just as many VCTs and EIS do.
The knock-on effect though could be that VCT and EIS investments with some sort of asset backing may be restricted. Indeed, the consultation paper suggests ‘lower-risk’ schemes are in the government's sights.
The consultation is still underway and final recommendations are expected to be presented to the Chancellor ahead of the Autumn Budget 2017.
It is possible – likely, some think – that in the Autumn Budget the Chancellor will announce investors can only benefit from EIS tax reliefs if they invest in higher-risk growth EIS. The days of asset-backed EIS might be numbered although nothing at this stage is set in stone.
What could investors do?
If asset-backed EIS are restricted, the measure could be introduced with immediate effect. This has happened in the past when announcing other changes to tax relief. We think it is unlikely that changes could be applied retrospectively.
So, if you are planning to invest in asset-backed EIS this year, and are comfortable with the risks of investing, it may be prudent to act soon. In particular, you may want to consider investments which aim to allot shares prior to 22 November.
We’re talking to the main asset-backed EIS providers, as well as single company EIS, to identify those that could allot soon. If you would like to hear about such investments, please complete the form at the top of this page.
There is, of course, the possibility that nothing will change, or the Chancellor makes other amendments to EIS and VCTs.
What are asset-backed EIS?
At their simplest, they are EIS that invest in trading businesses which own significant assets. This could include pubs, hotels, factories and children’s nurseries which operate from their own premises, or businesses that own valuable machinery or equipment.
These assets can provide some value to investors if the business doesn’t do as well as planned. Take an investment in a new pub. Even if it the commercial venture fails, and the business closes down, there could still be residual value in the freehold of the premises.
In other words, asset backing could mitigate some of the risks inherent to investing in smaller companies. This is one of the reasons investors have historically favoured this type of investment.
The window of opportunity may be closing soon, so investors may wish to consider acting now.
EIS tax benefits, a quick reminder
To encourage investment in smaller businesses, the government offers a range of tax reliefs to wealthy or sophisticated investors.
- Up to 30% income tax relief, if you hold the investment for at least three years
- Carry back – offset the tax relief against this or last year’s income tax
- Tax-free growth – any capital gains are tax free
- Capital gains tax deferral relief – you can defer capital gains liability from other investments by investing that gain in EIS
- Inheritance tax relief – up to 100% relief from inheritance tax, if you hold the investment for two years and still hold it on death
Please note, these reliefs are those currently applying but could change in future and depend on investments remaining qualifying. The value of tax benefits will depend on circumstances. Your capital is at risk. You should invest on the merits of the investment and not for the tax relief alone.
Photo credit: Chatham House