Tax-efficient investing to boom despite heightened risks

Investor interest in tax-efficient EIS funds is expected to rise despite managers being forced into higher-risk investments as a result of recent rule changes.

Half of advisers surveyed by the EIS Association who already advise on the schemes said interest among investors looked set to rise rather than fall despite changes meaning managers must invest in more growth-oriented companies.

A third (33%) of advisers expect personal sales of EIS funds to increase following changes revealed in last year’s budget while a further 14% who do not offer EIS said they were considering doing so in future.

The government aims to prevent generous tax relief being applied to schemes purely focused on preserving capital, often the subject of scorn from some who accuse high-net worth investors of “avoiding” tax via the schemes.

Instead, EIS managers must invest in early-stage growth companies, a higher risk proposition for many with the EIS investment limit doubled from £1m to £2m.

Mark Brownridge, director general of the EIS Association, said: “The rise in interest in EIS as a consequence of the budget is good news for many of the UK’s brightest companies.

“The industry has accepted the need to focus purely on supporting growth companies and this, coupled with the increase in allowances, will lead to billions of pounds of capital being injected into promising early-stage businesses in the decade ahead.”

General tax planning, retirement tax planning and portfolio growth were all tipped as the top reasons investors would opt for an EIS fund.

However, the biggest barrier to investment among most remained the risk associated with it, according to the survey.

Brownbridge said a “healthy awareness” of the risks involved in investing in early-stage companies should be “welcomed”.

“It shows the tax tail is not wagging the investment dog”, he said.

Dan Rodwell, managing director of GrowthInvest, said: “Over the last two years we have seen increasing interest in EIS from financial advisers – those who are experienced in EIS and those wishing to integrate EIS products into their client offering for the first time.

“We welcome the clarification from HMRC and are encouraged to see such a positive message coming out of this piece of research.

“We hope that the next 12 months will see the start of a new era of EIS investing.”

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