Jack Rose: Banging the drum for tax-efficiency

The tax-efficient sector has a convincing message that deserves a wider hearing so, argues Jack Rose, every opportunity should be taken to talk up the benefits for both investors and the wider economy

Despite fears to the contrary – and regardless of historically high levels of uncertainty affecting the UK investment sector – the tax-efficient space enjoyed a successful year in 2018/19. In fact, looking purely at the venture capital trust (VCT) sector we can see it was another record year.

Funds across the space raised a record £731m, according to the data from the Association of Investment Companies – the second highest amount since the tax shelters were launched in 1995. Whether it is VCTs, Enterprise Investment Scheme (EIS), seed EIS or even business property relief, the logic of encouraging enterprise to consider private investors as a source of early-stage funding now appears unanswerable.

At the same time, government policy is impacting competing areas of investment – for example, with regard to reduced pension limits and restrictions on buy-to-let. As such, investors are being gently corralled towards different means of furthering the funding of their retirement and this push-and-pull dynamic helps explain in large part the growth of the tax-efficient sector to date.

Admittedly, it may not have been a linear journey: the various attempts to hone the growth imperative – and bring to a halt the exploitation of various loopholes or what we might kindly call ‘ambiguities’ in the rules and regulations – have had their impact, not least in recent years.

In particular, the picture was less positive for the EIS, which has been the focus of most of the changes that have taken place. Yet despite the reported £400m drop in investment levels in 2018/19, there is still plenty of evidence of a continued investor enthusiasm for putting money into areas of tech and particularly tech-enabled companies.

So the sector can just sit back and watch the money roll in, then? Well, not quite. An interesting statistic from the 2018 HMRC results revealed that, while VCT investors claimed income tax relief on £500m of their investment in the 2016/17 tax year, that total was shared between only 15,120 investors.

When comparing this figure with the approximately 300,000 people that are due to be hit by the new annual pension taper and the many more that will be affected by the lifetime limit of £1.055m, the question stands – why are more people not making the most of these tax relief vehicles?

The impact of the new pension regulation is evident in the thousands of NHS doctors retiring early or moving to part-time work due to restrictions placed on pensions via this new tapering system that cuts annual limits on pension savings. This example is only a microcosm of what will happen in the broader market and other industries.

The fact that the number of investors claiming tax relief is so small – although the 15,120 will be augmented by the number of individuals taking advantage of EIS and SEIS investments – means the sector to date has really only been speaking to a very small percentage of the overall potential audience.

In other words, the message of tax-efficient investments is taking its time to percolate down through the tiers of investors. The job of convincing more people to take up the evident opportunities in the tax-efficient space is as yet unfinished.

In part, this is about education. More can be done by everyone to reach out to the wider audience of investors and financial advisers. The sector has a convincing message and it deserves a wider hearing. Every opportunity should be taken to talk up the benefits for both investors and the wider economy.

Revisit sector structure

That said, I would argue the industry and the government also need to look again at the structure of the sector. In particular, the world of VCTs is very static due to the expense and difficulty of launching a new fund. There have been a handful of new entrants in recent years – Draper, Pembroke and Seneca – but they have been few and far between.

The situation is better with EIS where there have been a number of new funds arising in the past couple of years hoping to take advantage of the sharper focus on growth investing. Here you could mention such debut funds as Amberside Capital, Fuel Ventures and Velocity and this fresh crop is a sure sign of more providers seeing an opportunity – and also of greater investor enthusiasm. It is good news and it needs to be further encouraged.

Hurdles remain, though. In the eyes of many advisers, the appeal of tax-efficient investments has diminished along with the demise of the various capital preservation schemes. That element of the potential audience has likely gone forever.

Yet they will be replaced with an audience of investors who are more attuned to the renewed focus on growth potential. That is where the sector needs to focus its attention and where it will see the most rewards.

Jack Rose is head of tax-efficient products at LightTower Partners