It may seem counter-intuitive for advisers to suggest their clients make a high-risk and potentially high-return investment into a venture capital focused EIS fund, in an uncertain economic climate. However, in addition to the benefit of investing in high growth technology companies at (potentially) the bottom of the market, there are multiple tax related drivers:
1. Clients are sitting on cash in a low interest rate environment
2. Delay of the tax-efficient investments that were planned for early 2020
3. The stamp duty holiday is driving the sale of second homes creating Capital Gains Tax issues
4. The reduction of Entrepreneurs Relief to £1m
5. Future budgets are likely to increase Capital Gains Tax
Most of these tax-related points are a result (indirectly) of Covid-19; whether that’s the actions that clients have taken during the crisis to increase their cash buffer, or selling their second homes. In addition to the points above, Covid-19 has reminded us all of our mortality, and EIS qualifying assets are out of the estate upon death after two years, or immediately if replacement property relief is available.
After the equity markets crashed in March, the recovery has been strong and markets are now potentially overpriced. The companies that EIS invests into are not directly affected by market volatility, as they are unquoted and can grow very quickly in markets that have been positively impacted by Covid-19, such as the medical devices, remote working, digitsation, food delivery and gaming. In isolation, each small company is high-risk, but through diverse portfolio construction, these risks can be managed, and the high-return nature captured.
The combination of managing income tax and capital gains through EIS, and substantial new market opportunities for small companies, means that financial advisers are seeing good reason to consider EIS at the moment.
For more information, please get in touch with Russell Fryer or the Mercia EIS Team.