Financial planning using EIS SEIS and VCT video

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Date16 Feb 2016
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Created 25 January 2016

Hello and thank you for listening to this training video on EIS, SEIS and VCTs

Please take a few minutes to read this disclaimer as it is important that you understand the contents.  You can pause the video while you do so.

My name is Dermot Campbell and I am a chartered financial planner.  I am Chief Executive of Kuber Ventures Limited which offers a platform for investing in alternative investment including EIS, SEIS and other inheritance tax efficient investments.

The learning objective of this presentation is to understand which clients and planning scenarios are best suited to EIS, SEIS and VCTs.

As a recap, before moving on to look at the planning strategies, let’s compare the different types of investments.  Starting with VCT, you can invest £200,000 per annum in VCT.  With SEIS, you can invest a £100,000 per annum and also carry back to the previous year. In other words, you can invest a total of £200,000 in SEIS if the client has not used them in the previous year.

With EIS, there is no limit to the amount of capital gain that you defer through an EIS and you can claim a maximum of £300,000 in income tax relief which equates to a £1m investment.  As with SEIS, you can carry back to the previous year.  In effect this means that EIS investment is only limited by the amount of income tax your client has paid unless they are very high earners in which case, the limit is £2m taking into account carry back.

As a recap, VCTs benefit from income tax relief at 30%, and have tax free growth and dividends.  They don’t have any CGT or IHT planning uses.

EIS on the other hand have CGT deferral, IHT and income tax planning applications, while you should consider SEIS as an investment opportunity for higher and top rate tax payers, particularly those who have capital gains in the current or previous tax years.

So let’s consider some of the financial planning strategies.  Firstly the rules: Rule 1 – you must diversify.  Don’t be tempted to go for a simple life.  You should be looking to diversify widely.  In the case of EIS or SEIS, think 3 fly in 30.  When doing your due diligence, look at the managers closely.  You are selecting the manager, not the underlying investment.

Rule 2: With the planning, make sure that you do the whole job, not just sell the product. IHT planning must include reviewing the client’s wills.  You also need to justify the increase in risk in the client’s portfolio.

There are a number of planning opportunities that these investments are useful for:

For example, reducing the tax due on the surrender of an investment bond, or clients who cannot put more money into pensions or who are accessing their retirement benefits and will have an associated tax liability.  These investments can also be great for school fees planning as well as a diversifier for a mainstream portfolio.  They are particularly attractive to top rate tax payers as well as being a tool to reduce the impact of the dividend tax rules which come in next year.

The first planning scenario I am going to look at is the concept of rolling EIS investments.  This can be used for School fees planning amongst other things.  In this scenario, the  school is great because they only put their fees up every 3 years, by 20%.  Year 1 you invest £100k in an EIS claiming £30k income tax relief which can be used to pay the fees.  Same again in years 2 and 3.  By year 4 hopefully some of the first year’s investments will start to mature and return capital which can be reinvested – this time giving 40k because of the investment growth and so the process goes on.

With capital gains tax, you will remember that you can defer capital gains incurred up to 3 years before investment.  This can be used to gain additional years’ annual allowances, or to reorder losses and gains.

Imagine the situation where year 1 a client has a capital gain and year 2 a loss.  By investing in an EIS, they can move the gain to ahead of the loss completely wiping out the tax.

So to summarise for EIS and SEIS, these are ideal for clients who have various different tax liabilities including 40/45% income tax, Inheritance tax or capital gains tax.  They are also useful as part of a retirement planning or school fees planning exercise.  Overall, they tend to be used for HNW clients.

For these purposes, HNW means £100,000 income in the last tax year of £250,000 of investment assets excluding principal residence and pensions.  You can still use them for clients providing the client agrees not to invest more than 10% of their assets in them.

Because of the fund nature of VCTs, they can be used for low wealth clients as the minimum investments are often lower.  VCTs only give rise to income tax benefits and are suited to people who are not concerned about IHT or CGT.

These are particularly useful for retirement planning as they pay a tax free income and can be combined with pension de-cumulating.  They can also be used as a supplement for clients who are max funded in pensions.

So what do the investor profiles look like for these different investments?  SEIS are great investment opportunities for 40 or 45% tax payers who also have capital gains and whose income tax rate is unlikely to change.

EIS are good for CGT or IHT planning as well as income tax planning and VCTs are only suitable for income tax planning but do pay tax free dividends.

Kuber Ventures offers a platform for investing in EIS, SEIS and BPR investments.  Using a platform will help you for a number of reasons:  the main one being that it puts you in control of your client’s investments, making it possible for you to do a proper job for them.

Our platform is a simple fund platform that allows you to easily build a portfolio of investments for your client.  Funds flow into it the cash account of the platform, get allocated to the funds you choose for your client and the underlying investments get bought in a nominee and held for the benefit of your client.  When an investment is sold, the proceeds flow back to the platform and you will be in a position to re-invest the proceeds.

The platform helps you by simplifying the investment process overall but most importantly putting you, the adviser, in control of your client’s investments.  When you diversify you should look to diversify across the underlying positions, but there are some other important rules of diversification: look to spread the investment across different funding stages and sectors as well as different managers.  If the client is in good health, consider spreading the investment across a number of vintages, or years so that they get exposure to different parts of the economic cycle.

So, what next?  Have a look at your client bank and consider which clients you should be talking to.  Consider speaking to your professional connections such as solicitors or accountants.

Next consider what strategy you are going to adopt – perhaps meet Kuber and set up your own panel of preferred investments for the next few months.

Finally consider how you are going to market these opportunities to your clients.  Maybe send out a newsletter or arrange a series of CPD workshops.  Kuber is happy to help you put these together.

There is a lot of information available on the internet.  Have a look at our website where you will find a host of useful material, but also browse the HMRC website which is excellent.  The IHT manual or Venture Capital Schemes manuals are very informative and there is also a host of information on VCTs on the AIC website

Thank you very much for listening and good bye.