EIS Industry Report 2019/20

30 31 It is, of course, important to remember that an EIS portfolio, focused on higher risk investments, should not be considered as a replacement for pension investments, which will typically be lower risk. Rather, where an investor has reached their annual allowance, an investment into an EIS portfolio alongside the pension could provide a useful tax efficient option. However, in August 2019 the Treasury and Department for Health and Social Care announced the government would review how the tapered annual allowance affects senior clinicians. Following considerable media attention on the fact that “top doctors, surgeons and other high-earning clinicians” were choosing not to take overtime because of concerns they would breach their pensions limit, the government decided to consult on “full flexibility” over the amount these professionals can put into their pension pots. “Starting from next financial year, the new rules would allow senior clinicians to set the exact level of pension accrual at the start of each year,” the Treasury said. 15 The announcement continued: “Alongside the proposals for full flexibility, HM Treasury will review how the tapered annual allowance supports the delivery of public services such as the NHS.” This suggests that some in public sector jobs may no longer need to worry about the taper, potentially taking away an incentive for them to invest in EIS or VCT portfolios. VCT FUNDS RAISED (2010-2018) SOURCE: HMRC 2010-11 11-12 12-13 13-14 14-15 15-16 16-17 17-18 200 Funds raised (£m) 400 600 800 0 EIS FUNDS RAISED 2010-2018 SOURCE: HMRC 2010-11 11-12 12-13 13-14 14-15 15-16 16-17 17-18 200 Funds raised (£m) 400 600 800 0 Considerations for Investment / EIS and Pensions AIM AND EIS INVESTING ON THE JUNIOR STOCK EXCHANGE EIS investments must be in companies that do not trade on a recognised exchange. However, for the purposes of EIS, as well as for Business Relief and the tax reliefs associated with Venture Capital Trusts (VCTs), the Alternative Investment Market (AIM) is not considered to be a ‘recognised’ stock exchange. Therefore, investors can take advantage of the EIS reliefs as well as investing in companies quoted on “the world’s leading growth market”. This can offer investors a greater level of comfort because there are strict regulations that AIM companies must comply with, particularly around corporate governance and transparency. While not all 901 companies quoted on AIM will meet the risk to capital criteria for EIS investments, many do, meaning that there is a sufficient pool of potential investee companies to choose from. Despite this, AIM-focused EIS offers have not proved popular with managers. Figures from MICAP show that, as of June 2019 there were 33 open AIM offers on the market, of which 2 were EIS products. However, both of these were evergreen offers, meaning that they did not have a closed end: they had been launched years before the rule changes had come into force. In fact, no new EIS offers have focused on companies quoted on AIM since October 2015. This is perhaps surprising, given that since that time, there have been 15 VCTs launched onto the market. Of those, 4 were launched after the risk to capital condition had been brought in, proving that AIM-based offers can be sufficiently risky to meet the threshold. EIS and VCT have broadly the same rules in terms of qualifying companies, so it might have been expected that there would be a similar number of offers from the two. Part of the answer to this could be that, as VCTs are listed vehicles themselves, they are more comfortable with quoted companies. Experts also suggest that EIS investors prefer to choose unquoted companies rather than use AIM because of the greater level of influence they can exert. In most cases, EIS investments in non-AIM companies will see the fund manager take a seat at that firm’s board, meaning they are able to have some level of control in that company’s direction, helping to protect their investment to a certain extent. As a result, investment managers will often prefer to invest in an unquoted company where they can exert influence, rather than go for the increased corporate governance standards offered by the regulations applied to an AIM-quoted firm, where they have far less control over its future. 2019 AIM OPEN OFFERS NO. OF AIM OFFERS LAUNCHED SINCE RISK TO CAPITAL CONDITION INTRODUCED 33 TOTAL (2 EIS) 4 VCT EIS 0