The views and opinions expressed herein are those of the authors and do not necessarily reflect the views of LGBR and its affiliates or employees. The information set forth herein has been obtained or derived from sources believed by the authors to be reliable. LGBR does not make any representation or warranty, express or implied, as to the information's accuracy or completeness, nor does the author recommend that the attached information serve as the basis of any investment decision and it has been provided to you solely for informational purposes only and does not constitute an offer or solicitation of an offer, or any advice or recommendation, to purchase any securities or other financial instruments, and may not be construed as such.

News/Blog

9 Sep 2015

VCTs – what they offer and how they work

Background The UK government established Venture Capital Trusts (VCTs) almost 20 years ago to encourage investment into smaller UK businesses. The generous tax benefits offered compensate for the increased risk associated with investing in smaller, less liquid companies. Since their introduction in 1995 to the end of the 2013/14 tax year, VCTs have raised over […]

Background

The UK government established Venture Capital Trusts (VCTs) almost 20 years ago to encourage investment into smaller UK businesses. The generous tax benefits offered compensate for the increased risk associated with investing in smaller, less liquid companies.

Since their introduction in 1995 to the end of the 2013/14 tax year, VCTs have raised over £5.4bn according to the AIC, providing important support and funding to the UK’s SME sector.

Research from the AIC also suggests historical performance has been strong. The average total return for a VCT investment of £100 to 31 December 2014 was £164 over 5 years and £197 over 10 years (Source: AIC).

 

How VCTs work

In many ways, VCTs are similar to investment trusts but with additional investment rules in order to qualify for tax reliefs. VCTs are plcs and are listed on the London Stock Exchange. Investors subscribe for shares in a VCT, which will then look to invest into a portfolio of “qualifying” companies.

There are several investment criteria underlying companies must meet to be VCT qualifying including, but not limited to:

  • Companies must be unquoted or AIM listed
  • The maximum value of a company’s Gross Assets (before VCT investment) is £15m
  • The company cannot have more than 250 employees (before VCT investment)

At least 70% of a VCT’s cash must be invested in qualifying companies within 3 years. The remaining 30% can be invested in non-qualifying investments, such as cash, listed equities, debt and investment funds.

Because of the numerous rules to which VCTs must adhere in order to qualify for tax breaks, it is important to choose an experienced manager. We will be going into more detail on what to look for in a VCT manager in next week’s article.

 

Tax benefits

VCTs have a number of attractive tax benefits for investors. Initial investments can qualify for 30% income tax relief, subject to a maximum of £200k per investor and a five year minimum holding period. Furthermore, dividends paid are tax free and there is no capital gains tax (CGT) to pay when the VCT is sold.

 

Types of VCT

All VCTs invest into smaller UK companies however the market tends to split managers into four main types:

Generalist VCTs AIM VCTs Specialist VCTs Limited Life or Planned Exit VCTs
As the name suggests, they invest in a general portfolio of companies across the smaller and private equity universe, often across multiple sectors. Focus on companies listed on the AIM market. These are the only listed companies (daily priced) that “qualify” under VCT rules. AIM has been around since 1995 and is now a mature exchange, with more than £88bn raised and a total of 1,100 companies. Focus on companies in a specific sector, such as renewable energy, leisure, media or technology, where the manager believes they have an edge.

 

Similar to Generalist VCTs but tend to focus on lower risk, lower return companies with the main objectives of capital preservation and providing liquidity as soon as possible after the minimum five year holding period.

 

The role of a VCT in an investor’s portfolio

Financial advisers should analyse the VCT market thoroughly before recommending them. The AIC website provides a lot of useful research and information in this regard.

What type of clients are VCTs suitable for? Firstly, VCTs should be considered on their investment merits rather than simply a way of accessing tax reliefs. Given their focus on smaller, less liquid companies, VCTs will not be suitable for every client.

However, for those UK tax payers that can accept a higher level of risk and the minimum holding period of five years, VCTs can play a useful role in their portfolio.

The 30% upfront tax relief makes VCT suitable for clients looking to offset a large income tax liability. VCTs can also provide an option for investors seeking tax free gains, especially if they have already maxed out their ISA and pension contributions for the year.

Furthermore, because they offer tax-free dividends, the majority of VCTs will focus on providing regular income alongside capital gains. As such, VCTs can complement an investor’s income portfolio.

Chris Hutchinson, Manager of the £100m Unicorn AIM VCT comments: “VCTs are sometimes mistakenly considered as being solely focused on achieving returns through capital growth, but in reality many VCTs deliver attractive returns via regular tax-free dividend payments.”

 

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9 Sep 2015

An Introduction to EIS – what they offer and how they work

Background The Enterprise Investment Scheme (‘EIS’) is a government initiative launched in 1993-94, designed to encourage investment by individuals into early stage companies. Although over 20 years old, The EIS heritage actually stretches back to 1981 through its original guise of the Business Start-up Scheme (‘BSUS’) and then latterly the Business Expansion Scheme (‘BES’) in […]

Background

The Enterprise Investment Scheme (‘EIS’) is a government initiative launched in 1993-94, designed to encourage investment by individuals into early stage companies. Although over 20 years old, The EIS heritage actually stretches back to 1981 through its original guise of the Business Start-up Scheme (‘BSUS’) and then latterly the Business Expansion Scheme (‘BES’) in 1983, before finally becoming the Enterprise Investment Scheme we know it as today in 1994. Since ‘94, over 21,000 companies have received investment through the scheme and over £10.7bn has been raised (Source: HMRC & National Statistics Report Dec 2014).

How they work

Unlisted, or AIM listed companies can apply to HMRC to become “EIS Qualifying”, which requires meeting several investment criteria, including:

  • They must undertake a “qualifying trade” – certain trades, such as dealing in securities/financial instruments, forestry & farming are excluded
  • They must have fewer than 250 employees
  • The company must not be controlled by another company
  • The company’s gross assets must not exceed £15m before the investment, or £16m post investment
  • Any investment from EIS must not exceed £5m in total in any one year

It is also important to note that although often referred to as ‘EIS Funds’ they are not collective investment schemes. An investor in an EIS will be the owner of shares in its underlying companies, rather than owning shares or units in a fund.

Tax Benefits to EIS Investors

Given the investment criteria above, EIS companies are smaller and less liquid than larger, listed investments. To compensate investors for the extra risk taken, EIS offer a number of generous tax incentives, including:

  • 30% upfront income tax relief (subject to £1m investment in any tax year and provided shares are held for a minimum of 3 years)
  • 100% inheritance tax relief after two years
  • 100% capital gains deferral for the life of the investment
  • Tax-free growth
  • Loss relief

Ways to Access EIS Companies

Investors can invest in single EIS companies or can invest in EIS “funds”. Despite their names, EIS funds are structured as discretionary management services in which a manager with expertise in EIS / unquoted companies will use their knowledge to select a portfolio of EIS qualifying companies.

  • Single EIS Company – Investment is made directly into just one EIS company, meaning investors take on the risks/rewards of the company, which lacks diversification. However, there is often more clarity with the timings on the EIS tax certificates.

 

  • EIS Funds–The asset manager invests into a number what they believe to be strong EIS companies. The portfolio is usually made up of between five and ten underlying companies, increasing diversification. However, tax relief on cash is available only from the dates it is invested into each underlying EIS company, not the date of the initial investment into the fund.

 

  • Approved EIS Funds – like an EIS Fund (above) which the addition that The Fund has received advanced assurance from HMRC that it will qualify for EIS status before investor’s investments are made. The manager must invest 90% of the money within 12 months of raising capital to qualify but it does ensure EIS tax relief will be on the full amount at the initial date of investment into the Approved Fund.

Within each of these categories there is a multitude of different investment strategies covering multiple sectors, which we will cover in future articles.

What type of clients are EIS suitable for?

Firstly, although it is important to consider the tax planning implications for a client, as they say ‘the tax tail should not wag the investment dog’. EIS should be considered on their investment merits rather than simply a way of accessing tax reliefs. Given their focus on smaller, less liquid companies and therefore their increased risk, EIS will not be suitable for every client.

However, for those UK tax payers that can accept a higher level of risk and the minimum holding period of three years, EIS can play a useful role in their portfolio.

For financial advisers looking to recommend EIS investments to their client it is important to research the specific strategy and the market thoroughly. There are a number of independent sources such as; The Tax Efficient Review, The Tax Shelter Report and MiCap which provide a lot of useful research and information in this regard.

Ian Battersby, Business Development Director for Seneca Group, says that EIS can provide differentiation from the usual holdings in a traditional style portfolio; “EIS offer exposure to smaller companies that can potentially deliver excellent growth potential, whilst providing diversity to the client’s portfolio. Many EIS funds and investments can be quite uncorrelated to the more traditional investment markets, thereby providing further diversification within an investment portfolio”.

The 30% upfront tax relief makes EIS attractive for clients looking to offset a large income tax liability. The maximum you can claim is £300,000 in any one tax year.

Battersby goes on to add; ‘’The upside potential offered by investing in good quality smaller companies when combined with the very attractive tax reliefs available under EIS make this an increasingly compelling asset class in its own right’’

For those that have made a capital gain that is taxable, this can be deferred by investing the gain in an EIS. This will be deferred for the duration of the EIS investment. The capital gain liability can be from three years prior, or one year post your EIS investment (note this is the date from investment into qualifying EIS companies – something to watch for when using an EIS Service).

Because EIS also qualifies for 100% inheritance tax exemption after two years, they can also play a role in clients’ estate planning. If an investor holds the EIS investment at the time of death, the deferred capital gains liability is also removed along with the investment being zero-rated for IHT.

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9 Sep 2015

Intro to IHT via BPR

Background – What is IHT?   In its very simplest terms, inheritance tax is the tax paid on an individual’s assets when they pass away. Assets can include money, investments and property – the estate, which is usually passed to, or inherited by the friends and family of the deceased. Should the value of the […]

Background – What is IHT?

 

In its very simplest terms, inheritance tax is the tax paid on an individual’s assets when they pass away. Assets can include money, investments and property – the estate, which is usually passed to, or inherited by the friends and family of the deceased.

Should the value of the ‘estate’ (minus any debts outstanding) be valued in excess of £325,000, otherwise known as the nil rate band (NRB), a 40% tax is levied on the amount in excess of this threshold.

 

To illustrate the impact of this:

Estate value:       £525,000

NRB:                  £325,000

Taxable Estate:   £200,000 @ 40%

IHT Bill:              £80,000

 

Married couples are able to pass their estate to each other tax-free on death along with any of their nil rate band not used. This can potentially boost their NRB to £650,000 for the remaining widower.

 

The Growing Problem

 

Although once perceived as a problem only for the wealthy, an ever increasing number of people are finding themselves falling into an IHT liability. According to the Office of National Statistics, over £3.4bn was raised during the 13/14 tax year through IHT, £300m than the year before, meaning that IHT receipts have increased a substantial 43% since the 2009/10 tax year.

The well documented rise is asset prices we have seen in recent years, especially across London and the South East where house prices have risen on average 17.8% and 14.4% respectively in the last twelve months. The average house in London now costs on average £406,730 meaning that the number of people set to fall into the IHT trap is only set to increase.

The issue is further exacerbated by the nil rate band currently being frozen at £325,000 until 2018/19. Despite suggestions from various political quarters that the NRB will be increased to potentially £1,000,000 we can only plan for the current situation, not how it may develop in the future. This leads me onto how Business Property Relief (BPR) can help to reduce one’s IHT liability.

 

The solutions & specifically why look at BPR?

 

Unlike many of the alternative IHT solutions that are out there such as; gifting, trusts and equity release BPR offers a quicker and more flexible solution to the issue. Unlike trusts and gifting which are often complex and involve relinquishing ownership and control, BPR does not, meaning that should the tax landscape alter and the NRB be raised then any investment decision could potentially be reversed.

 

What is BPR and how does it work

 

BPR was introduced back in 1976 in order to allow small family businesses to be passed down from generation to generation without triggering an IHT liability. Since then those companies that qualify for BPR has been expanded, making it an attractive tax planning tool for individuals. Shares in BPR qualifying companies are zero-rated for IHT purposes after only two years, in other words they are outside your estate after 24 months.

 

There are three ways BPR can be accessed; EIS (which we discussed in our previous article), AIM portfolios (which we’ll discuss next week) and ITS strategies. The latter option are usually discretionary management services structured and managed by investment managers, who give investors access to a one or a number of underlying companies which qualify for BPR. These ITS strategies have grown in popularity in recent years, although often they are regarded as high risk in nature due to their investment being in small unquoted businesses. It is important to look at the risk in the underlying trade of the business and experience of the management team running the service when considering a client’s suitability.

Commenting on how BPR can be used, James Cranmer, a Partner at Triple Point says, “At Triple Point we have been using BPR to help investors mitigate their IHT exposure since 2006. It provides them with the fast and simple solution they are looking for. We can give investors access to businesses active in leasing and infrastructure funding, a popular choice with investors looking for rapid IHT mitigation and capital preservation.”

 

BPR Benefits

 

  • Speed: Unlike many other forms of estate planning such as trusts and gifting which can take up to seven years, BPR is outside your estate after two years
  • Flexibility and Control: As mentioned earlier, because you own the shares you retain control, you can top-up or redeem as you need
  • Simplicity: BPR is relatively straightforward, there are no complex legal structures, medicals etc.

 

BPR’s role for investors

 

Often for those clients where either there are legal or medical complications BPR can often offer a solution to help reduce an IHT liability. Because an investor owns shares to qualify for BPR it can make it particularly attractive for those clients with Power of Attorney in place as there are no issues with relinquishing control of the assets.

Obviously the speed at which BPR assets can be removed from one’s estate (two years) compared to some other planning ideas such as trusts and gifting (seven years), which can take up to five years longer make it an option for those that need to act more quickly.

As always it is important to consider client’s individual situation when considering BPR. It will not be suitable for all and there is a huge range of differing strategies and ways to access BPR that will work for different clients.

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9 Sep 2015

Why invest in EIS, VCTs and BPR?

Background Enterprise Investment Schemes (EIS), Venture Capital Trusts (VCTs) and Business Property Relief (BPR) products are by no means new in the market place. BPR was first introduced in the 1976 Finance Act, EIS replaced the old Business Expansion Schemes in 1994, whilst VCTs were introduced in 1995. Whilst figures for assets raised in BPR […]

Background

Enterprise Investment Schemes (EIS), Venture Capital Trusts (VCTs) and Business Property Relief (BPR) products are by no means new in the market place. BPR was first introduced in the 1976 Finance Act, EIS replaced the old Business Expansion Schemes in 1994, whilst VCTs were introduced in 1995.

Whilst figures for assets raised in BPR schemes are hard to come by, the last tax year saw £1bn raised across EIS and VCTs. Since their inception EIS have attracted over £10.7bn* and VCTs over £5.4bn** into the UK SME sector.

However, despite all three structures having an established market with a +20 year track record, many financial advisers still do not include them in their tax planning arsenal – even though recent changes in government legislation have made the case for these tax efficient structures even more compelling.

The introduction of GAARs (General Anti-Abuse Rules) and DOTAS (disclosures of tax avoidance schemes) has been described as the ‘kiss of death’ for aggressive tax avoidance schemes, demonstrated by a number of high profile cases in the tabloids over recent years. This is leading many advisers, helped by the new RDR ‘whole of market’ legislation, to look towards government approved EIS, VCTs and BPR for their tax planning needs.

Why the Tax Breaks?

Each of the three structures offer a number of different tax incentives allowing them to fulfil different needs in an investor’s portfolio. For example, VCTs offer tax free dividends to investors meaning they may be more suitable to an investor looking to maximise income.

However, a golden rule of investment is that you don’t get anything for free. The generous tax incentives offered by the government are designed to offset the risk of investing in smaller, unquoted companies. Furthermore, investments into these strategies must meet certain criteria both at the investor level (such as minimum holding periods to qualify) and the underlying investment level (such as a maximum revenue size or number of staff). With the higher risk nature of these strategies, they are not always suitable for every investor but for the relevant client they can form an important part of an investor’s portfolio.

Catalysts Behind the Growing Market

Aside from the changes in government legislation outlined above, there are a number of other factors driving the growth in the market.

Firstly, recent changes in pension rules (lowering the annual and lifetime contributions to £40,000 and £1.25m respectively) combined with the added to take drawdowns (vs. annuities) has meant advisers have a series of alternative pension planning investments to consider, including VCT products in particular. The tax free dividends offered by VCTs make them an attractive alternative source of tax-free income that can complement a traditional pension portfolio.

Secondly, inheritance tax continues to be an ever-growing problem for advisers and their clients, exacerbated in areas such as London and the South East by rising property prices that have continued unabated even post-2008. The result is that a record number of people’s estates are due to fall outside of the current nil rate band of £325,000. Official forecasts suggest that inheritance tax revenues are anticipated to take the highest share of the economy since the 1970s and expected to rise by nearly 11% a year for the next four years, according to the Office for Budget Responsibility.

With the government stating that the nil rate band will remain at the current level until 2018/19, BPR strategies offer a simple way for investors to reduce their IHT liabilities after just two years. Furthermore, BPR strategies offer a flexibility, control and timescale that traditional estate planning options, such as trusts, often cannot.

Lastly, the dynamics for SME asset raising through EIS and VCT structures continue to be favourable. Six years on from the 2008 financial crisis and, despite the more recent economic upturn, the market for SME funding remains well below pre-2008 levels. With traditional sources of funding difficult to secure, demand for funding via EIS and VCTs far outstretches supply. This has created a positive environment for EIS and VCT managers with a number of potential deals in which to deploy new cash.

 

Conclusion                                                                        

There are a diverse range of EIS, VCTs and BPR products available in what is long-established, multi-billion pound market that provides vital investment into the UK SME sector. Each structure provides a different range of tax planning benefits, which can fulfil a range of clients’ tax planning needs.

In the coming weeks we will examine EIS, VCTs and BPR strategies in further detail, including their key features, how best to utilise them in a client’s portfolio and what to look for in a good manager.

However, until next week it is suffice to say that these structures can form a valuable part of an adviser’s tax planning arsenal, with the market and demand only set to grow.

 

*Source: HMRC, December 2014  https://www.gov.uk/government/statistics/enterprise-investment-scheme-and-seed-enterprise-investment-scheme-statistics-december-2014

 

**Source: AIC, April 2013  https://www.theaic.co.uk/aic/news/press-releases/vct-sector-raises-%C2%A3403-million-in-201213-tax-year

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7 Sep 2015

Unicorn AIM VCT is a finalist in the 2015 Investment Company of the Year Awards

Investment Week has announced that the Unicorn AIM VCT is a finalist in the 2015 Investment Company of the Year Awards in the VCT category. The Awards aim to recognise and reward excellence in close-ended fund management – highlighting investment companies that produce consistent performance and where there is, in the judges’ opinion, a high […]

Investment Week has announced that the Unicorn AIM VCT is a finalist in the 2015 Investment Company of the Year Awards in the VCT category.

The Awards aim to recognise and reward excellence in close-ended fund management – highlighting investment companies that produce consistent performance and where there is, in the judges’ opinion, a high likelihood that the investors will not be disappointed in the future. The awards will be held on Wednesday 25th November at The Park Lane Hotel, Mayfair.

The judging panel is made up of some of the UK’s leading researchers and investors in investment trusts and closed-ended companies, as well as several senior board members with many years’ experience in the industry. The judges identified the most consistent performers and Investment Week reward the top managers across a range of sectors.

The Unicorn AIM VCT is the largest AIM-focused VCT in the market and was awarded What Investment Best VCT 2014. It was also the joint-highest rated AIM VCT by Martin Churchill’s Tax Efficient Review last year.

The £125 million* VCT is managed by an experienced team, with a proven long term track record and provides investors with exposure to an established, diversified, maturing and strongly performing portfolio of British smaller companies, the majority of which are listed on the FTSE AIM market.

 

*Source: Unicorn Asset Management as at 31/08/15

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30 Jul 2015

Seneca IHT Receives Allenbridge Report

We are delighted to announce that Seneca IHT has been favourably reviewed by Allenbridge. Click here for a copy of the report For more information please email LGBR Capital or call 020 3195 7100

We are delighted to announce that Seneca IHT has been favourably reviewed by Allenbridge.

Click here for a copy of the report

For more information please email LGBR Capital or call 020 3195 7100

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23 Jul 2015

Interview with Unicorn AIM VCT Fund Manager Chris Hutchinson

Intelligent Partnership hosted an interview with Chris Hutchinson in which he discussed not only the tax benefits associated with VCT’s but also the advantages of the smaller companies universe and specifically the AIM market. Click here to see the whole interview To find out more about the Unicorn AIM VCT call 020 3195 7100 or […]

Intelligent Partnership hosted an interview with Chris Hutchinson in which he discussed not only the tax benefits associated with VCT’s but also the advantages of the smaller companies universe and specifically the AIM market.

Click here to see the whole interview

To find out more about the Unicorn AIM VCT call 020 3195 7100 or click here to email.

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