When considering tax-efficient investments, advisers and clients should be fully aware the underlying assets are unquoted stocks, which are therefore likely to be high-risk and illiquid. That being so, there is only so much control they may have over the investment and timings.
Nevertheless, there are some simple steps advisers can take to attempt – at least in part – to gain some control of the potential timings, such as when the client may be able to claim any potential tax reliefs and when they ultimately may be able to exit.
In the lead-up to the start of April, I am sure there will have been advisers working through the tax-planning issues of their clients and wondering why they had not taken more notice of the deadline in the months leading up to it.
Certainly, when it comes to a number of clients, the inclination to leave everything until the last minute need not be the case with some forward thinking and perhaps more time to give it the care and attention it needs – getting ahead of the game can bring numerous advantages.
Of course, there are clients you will deal with who perhaps have no choice when it comes to the timing of the income they receive, the detail of their tax responsibilities and a determination of what money needs to be put aside for tax and what can be suitably deployed in various investments – the self-employed, for example, or company directors who may not know their full tax situation until relatively late in the day, or indeed beyond the end of the tax year.
In that sense, there are always going to be clients who are not suitable for such ‘early’ advice and tax planning but, conversely, there will also be those who might be able to make far better use of their investment money if they were able to invest earlier in the year.
The old adage of ‘the earlier the better’ – certainly when it comes to tax-efficient investments such as Enterprise Investment Schemes (EIS), Seed EIS (SEIS), and venture capital trusts (VCTs) – can often be a truism for any number of reasons, and even more so in light of the Government’s changes to the EIS sector.
These changes, introduced in last year’s Autumn Budget, put the EIS onus on ‘knowledge intensive’ companies where investee businesses are likely to be targeting growth from day one – and therefore investors who have their money deployed earlier in the year may potentially expedite returns and ultimately an exit compared with those who wait until a period very close to the end of the tax year.
As an example, we have investee companies that complete their funding rounds well before the end of the tax year and therefore investors may well miss out on these opportunities if their investment is unnecessarily delayed.
Our own focus is on deploying EIS funds on a monthly basis and so, if clients are investing in May/June/July, they should be able to claim any potential tax reliefs imminently as well as ‘feeling the benefit’ of any growth of those investments much earlier. Of course, some investors will need to wait – however ‘getting in early’ not only keeps you clear of the pre-end of tax year rush but ensures the client gains deployment at the earliest opportunity.
This may seem obvious, but it should be noted not all managers are alike and there are those in the tax-efficient investment sector that state categorically they will take months – in some cases, even years – before deploying funds.
So not only would the client miss out by leaving it late in the tax year but the choice of investment could determine they are doubly incapacitated by delays in the deployment of funds. That is a state of affairs that could put your client seriously behind the eight ball when it comes to relief and returns.
Overall, being able to invest early in the tax year is a benefit that should not just be explored but, where possible, grasped. By doing so, it is possible for advisers and their investors to control their investment timings, investing as soon as possible and – subject to establishing the quality of the investment manager and product, of course – being able to take advantage of early deployment and all the benefits this can potentially bring.
Ultimately, as an adviser, you will want to highlight your value to clients at the earliest opportunity so enabling a client to reclaim tax as expeditiously as possible may be a feather in your cap.
We may only be a couple of months into the new tax year but ensuring your clients are aware of the advantages of investing in tax-efficient solutions now – rather than waiting until the inevitable rush pre-next April – will ensure they can claim potential tax reliefs as early as possible, allow carry back relief in some cases, and ensure their funds are deployed quickly to give them the best chance of maximising returns and potentially shortening the investment period.
Andrew Aldridge is partner, head of marketing at Deepbridge Capital