EIS Planning Is An All Year Round Necessity
Like the Dog’s Trust adverts used to say, 'a dog is not just for Christmas,' there remains a misconception that EIS investments (and other tax-efficient investments) should only be considered at tax year end. This is not the case and EIS is ‘not just for tax year end.’
The tax planning opportunities for advisers to utilise tax-efficient investments throughout the year are considerable and should form part of any adviser's review meeting with their client.
At this time of year, a majority of clients will know their tax position for the previous tax year and possibly for the coming year. This is then a prime opportunity to discuss how Government schemes such as the Enterprise Investment Scheme (and Seed EIS) could be utilised in order to reduce or defer tax.
There may be good reasons to consider focusing on such investments now rather than in the usual 'rush' around February and March. It's no great secret that tax year end remains peak season for EIS and VCT investing. This surge in investments has previously caught-out some managers who haven't had the capacity to deal with demand or indeed have supplemented capacity by deploying investors’ subscriptions in to investee companies which may not have the growth potential that would usually be expected.
I would always recommend advisers understand where their clients' investments are going. If a manager can't tell you in to what companies, or the types of companies, they will be investing in then serious question should be asked.
It is not just the quality of the underlying investments which is a potential reason for investment throughout the year, but also the potential opportunity to recover due tax at an earlier opportunity. For example, investing via EIS during the Spring months could then be used to reduce a client’s July payment on account. Similarly, if the client has relatively predictable income or gains, or if they have an expected windfall, it can make good sense to ensure EIS investments are considered at or ahead of time in order to ensure that there is no delay in recovering any potential tax reliefs.
The other reason to invest at the earliest opportunity is the potential mitigation of inheritance tax. EIS companies qualify for Business Relief and could therefore be classed as outside of an estate for IHT purposes after just 2 years of investment. In order to get that Business Relief 2 year clock ticking, the investment has to be invested so the sooner an investment is made, the sooner it will potentially be outside of the estate.
The simple tip is to not to wait until tax year end but to plan as early as possible, thereby ensuring that investments are being made in carefully selected companies rather than simply companies that 'will do.' Tax-efficient investments should be part of regular reviews for those clients where there is a tax need and where they have an appropriate risk rating.
EIS, SEIS and VCTs can be an important tool within a client’s wider financial plan. My simple suggestion is to think about and deal with tax scenarios as soon as they become evident rather than waiting until the last minute.
Ian Warwick is Managing Director at Deepbridge Advisers Limited