Tax efficient investing for
high income earners
Martin Churchill
Editor, Tax Efficient Review
Tax Efficient Review
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Subscription based £545+VAT
per annum
Covers Venture Capital Trusts,
Enterprise Investment Schemes,
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Tax Efficient Review
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Briefing Notes on major corporate
actions e.g. mergers, Enhanced
BuyBack offers
VCT Valuation Service
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The VCT Valuation Service will help IFAs
support VCT clients on an on-going basis
and meet the proposed Retail Distribution
Review requirement that on-going
charges should only be levied where a
consumer is paying for on-going service,
such as a performance review of their
investments, or where
£50+VAT per portfolio report
not per VCT
How did VCTs do in tax year 2011/12 (1)
Hectic year:
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Solar offers and December 12 ruling
Consultation
6 December proposals
Finance Bill “investment limits condition” restriction on any portfolio
company receiving more than £5 million from any state aided, risk-capital
investment source in any 12 month period
Split between prospectus and non prospectus offers
Overall there was c £400m on offer and around £240m was raised
in new money in period October 201-April 2012 net of c£70m of
Enhanced Buyback offers and £45m from previous year
Not a bad outcome but lower than the £350m (net of £10m
Enhanced Buyback) in tax year 2010/11
How did VCTs do in tax year 2011/12 (2)
• Still in my view roughly 50:50 split between Generalist and
Planned Exit offers although some solar offers this year
were hybrids
• EIS had a strong showing and undoubtedly took market
share from VCTs
• No new entrants into VCT market
• Low amounts raised by
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Iona Environmental VCT B shares (£800k out of £10m)
Ingenious (£4.1m out of £15m)
Triple Point (£3.6m out of £16m)
Edge Performance VCT H share (£2m)
Outlook for current tax year
• More uncertainty
• Effect of Retail Distribution Review on VCT launches
• Effect on Planned Exit VCTs of Disqualifying Purpose Test
The test will disqualify shares which are issued subject to arrangements whose
main purpose is to generate access to the reliefs in circumstances where either
the benefit of the investment is passed to another party to the arrangements (i.e.
the investor), or the business activities would otherwise be carried on by another
party.
• Consultation Paper 12-19 (Restrictions on the retail distribution of unregulated
collective investment schemes and close substitutes)
• EIS offers are coming through in large numbers (and first Seed EIS retail
offers are in the market)
• Generalist could benefit from potential reduced attractiveness of Planned Exit
coupled with actual five year results
• Will RDR mean most fund raising moves to 2012?
• Effect of Consultation Paper 12-19
Structure issues
• More mergers/acquisitions (Octopus Apollo, Octopus
Eclipse)
• More Enhanced Buyback offers
• More emphasis on Investor relations
• When is a dividend a real dividend and should distributions
be lumpy or smoothed
• Well implemented buyback must be in place to raise more
funds
Driving interest in EIS this year
• Raised £500m through retail channel in
2011/12 tax year (TER Estimate)
• Few government-supported tax-efficient
investment schemes remain
• Few ways to mitigate the new 50% top rate of
Income Tax
Restricting interest in EIS this year
• Compliance/PI cover issues
• What is a UCIS
• Tax break less clearcut that VCT
• Corporate governance
• Track record
EIS hurdles in 2012
• IFAs understanding of offering
• FSA approach to EIS/UCIS
• IFA scepticism about performance
• Evidence of track record
• Distribution is biggest hurdle to new entrant
Seed EIS
The investor tax reliefs:
50% tax relief against income tax
28% relief against capital gains tax (tax cancelled, not merely deferred)
ability to write off 50% of investment (net of income tax relief already received)
in failures against income tax (even where the Company had not yet
commenced trading provided its intention to trade was clear)
Seed EIS investors need to ask themselves two basic questions:
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on an investment of just £150,000 maximum, how can the investee
companies support the level of charges and fees that the fund manager
will seek to levy
where is follow-on investment coming from
Driving interest in BPR this year
The definition of a "business" is wide and is not as restrictive as the accepted
definition of a "trade" (ICTA 1988 section 832) and as a result there are IHT
offerings based upon financing opportunities which would not qualify as a
"trade" in an EIS or VCT.
The aim of a provider is to find a BPR business opportunity that meets all the
investor requirements listed below and is also scalable.
1. Minimises tax risk
2. Protects the downside risk
3. Allows a modicum of upside to cover running costs and possibly pay a small
annual return
4. Allows liquidity for early exit or partial return of capital
5. Has low provider costs