EIS Industry Report 2018/19

54 55 2. WITH THE SHIFT OF EIS TO GROWTH CAPITAL FROM CAPITAL PRESERVATION, HAS THIS MADE IT EASIER OR HARDER TO RECOMMEND? Just over 36% of advisers feel that EIS is harder to recommend since the rule changes from the 2017 Budget. This comes as no surprise, considering there are now no capital preservation offers available in the market. What is encouraging is that over 19% of advisers think that EIS is easier to recommend. The risk-to- capital condition gave new legitimacy to EIS, and many advisers will, of course, appreciate this. Many advisers and clients would have focussed largely on the EIS income tax relief. However, with a successful high growth investment, the CGT benefits should be far more valuable. Advisers should no longer have significant concerns over continued legislative challenges to the tax reliefs, and they’ll be able to pass that confidence onto their clients. 1. HOW OFTEN DO YOU RECOMMEND EIS INVESTMENT TO YOUR CLIENTS? Approximately 88% of our cohort of advisers are recommending EIS to their clients. This is an increase on our survey last year, where 83% of respondents were recommending EIS to their clients. However, there was somewhat of a dip in the amount of advisers recommending EIS frequently. Last year, 33% of advisers were recommending EIS frequently, as opposed to just under 17% this year. This dip in EIS advocates is likely to be connected to the increased risk profile of the investment since the introduction of the changes announced in the 2017 Budget. Advisers and their clients may be taking more time to assess new offers (some of which will have no track record). There has been a withdrawal in the number of previously evergreen offers (in familiar sectors) which advisers and clients had become comfortable with. ADVISER SURVEY ANALYSIS IS EIS HARDER TO RECOMMEND? We surveyed over 100 financial advisers who are active in the tax-efficient space, to garner their views on EIS since the 2017 Autumn Budget. As the EIS landscape has changed so drastically since last year’s Budget, it’s important to see how financial advisers have reacted to the changes. Our survey found that 36% of advisers are finding EIS harder to recommend since the rule changes. This is actually a smaller proportion than expected, considering the end to capital preservation within EIS offers. It’s also interesting to see that the increased investment threshold for knowledge-intensive companies is having a minimal impact. Approximately 80% of advisers said the increased headroom made no difference to how they approached EIS. FREQUENTLY SOMETIMES NEVER 3. WHAT ARE YOUR TOP THREE REASONS FOR RECOMMENDING EIS? The top reason for recommending EIS was, unsurprisingly, non-IHT tax planning. The income tax and CGT benefits still appear to be paramount, despite the shift to growth capital investment. Interestingly, over 68% of advisers are recommending EIS for its IHT planning benefits. Whilst shares in EIS qualifying companies generally qualify for Business Relief for IHT mitigation after two years, there are many other lower risk strategies available in the market which aim to achieve similar IHT mitigation, but have a greater focus on capital preservation. Further, EIS investments aren’t always seen by all investors as a ’long-term’ hold. The minimum holding period is generally three years from the issue of the EIS shares, but many investors would consider exiting their investment at the earliest optimal opportunity after this holding period. This is due to the anticipated CGT free exit, which is generally the most efficient method of realising the tax-free investment return. Growth comes in as the fourth most popular reason for EIS investment. Really, this should be higher, and we are likely to see a change in this figure over the coming years as advisers and their clients get to grips with the changing landscape. Financial advisers and their clients will have to shift their focus as to what EIS investment is for - growth capital investment. The focus of the tax benefits is to encourage this high risk, growth capital investment, rather than underpinning the investment return, as was perhaps the case in certain strategies previously. HARDER EASIER STAYED THE SAME 17% 71% 12% 36% 19% 45% Market Research / Adviser Survey Analysis 56% of advisers see their use of EIS increasing over the next 2 years Tax Planning (non IHT) 85% 68% 52% 50% 12% 12% 4% IHT Planning Diversification / Risk Management Growth Positive Social / Economig Impact Other Income