Delio Roundtable: Tax efficient investing in the UK

Investors can be cautious when investing in startups, given that 29% of new businesses launched in the UK fail during their first year. This poses a difficult challenge for entrepreneurs and advisors.

To combat this and encourage early stage investment and innovation, the government introduced three tax efficient investment programmes: SEIS (Seed Enterprise Investment Scheme), EIS (Enterprise Investment Scheme) and VCT (Venture Capital Schemes). Under the schemes, private investors benefit from a tax break when investing in the early stage, ‘high-risk’ companies.

To get more insight on how the schemes are working, we brought together those who have been working with them in our latest roundtable.

What are you seeing in the market from capital flows and investor appetite?

Between 2020 and 2021, the SEIS and EIS schemes have raised around £1.8 billion helping around 6,000 companies. However, given the current economic climate some investors seem to be more hesitant to invest.

One member of the group stated that “there’s been a lot of nervousness from investors this year. But we’re starting to see a bit more risk on appetite which is good to see. That’s normally a precursor that there’s some light at the end of the tunnel.”

They added, “specifically with the tax-efficient range, VCT flows have been good for us. We’re probably just under where we were this time last year, which was a record year.”

Another commented saying, “I think there’s still a bit of nervousness around that sort of investing at the moment, and it’s taking a little bit longer to get people’s comfort levels back up into EIS. It’s a fantastic opportunity right now, particularly with the tax relief given the forthcoming increase in everyone’s tax bills. It should be at the front of everyone’s mind.”

Are you seeing any change in the profile of the clients investing?

With the continued support of tax efficient schemes, the government has hoped that more capital is deployed into early stage investments. The tax relief benefits make them more attractive to investors who perhaps haven’t invested in this stage previously.

“It’s relatively consistent, we have a huge range of clients who use VCT and EIS. Generally across the board, every one of our clients has a tax liability and could do with a conversation about this type of investment”

Another member commented “I see VCTs being popular across the industry. We personally have a good inflow of investors coming in at the pre-seed and seed stage where valuations have remained pretty good.”

“If investors have income tax issues, it makes sense to still be investing and it makes sense for them to use these products.”

One member, who is part of an angel network, added; “On the angel investing side we’re seeing angels in the UHNW category with high risk tolerances deploying capital. We also note the individuals who are doing it are more focussed on a tax mitigation bill.”

They explained, “I now see more clients who say they’ve already dabbled in EIS themselves, whether that’s as an angel investor or through networks. But it does seem that more of our clients have experience of early stage investing and they seem to be doing it more themselves, rather than through an advisor.”

Generally is there enough education in the market about tax efficient investing?

As the schemes remain relatively unknown by the majority of investors, there’s a lot of work needed to drive awareness around EIS, SEIS and VCT. This lack of awareness can mean less uptake as people are more cautious, they don’t fully understand the benefits, or might not even know they exist.

One member of the group commented; “I think the challenge for us is down to the lack of awareness that you can do a managed EIS service. I think people don’t realise you can go down the managed route and have someone take all of the due diligence and management burden away from you. To do EIS yourself successfully, you need a lot of time and knowledge as well as a lot of money. That’s the selling point for our advice service.”

Another explained what they’re doing to educate their investors; “We’re continuing to provide education for our network to bring them up to speed on what the SEIS and EIS benefits can be. We’ve worked with EISA (Enterprise Investment Scheme Association) who have been keen to get involved and talk to companies and investors about it.”

How about education with your advisors?

If advisors aren’t fully confident with the schemes, they’re less likely to offer it to their clients.

One member commented “The challenge for us is getting our advisors and bankers comfortable with the schemes. They love the concept and they get it, but getting the bandwidth with them can be challenging so it’s hard for them to prioritise against other core asset classes and solutions.”

They went on to explain that “for the group of advisors who have got to grips with it and position it well with clients, it generally becomes an easy sale for them, particularly VCT. Once you have a client bought into VCT, it helps to deliver business year after year. EIS and SEIS should be the same, once you have people understand the concept that they’re in it for the long term.”

Another added that adviser training has been a significant part of their strategy this year. “This has helped advisers ask the right questions and figure out which EIS/VCT makes up the client’s portfolio, which is a new area for them”, they said.

Does anyone see any changes to allowances and the general positive trends of the schemes?

In the mini-budget of September 2022, the schemes were announced to be remaining which is a positive step.

Given how many policies were changed or cancelled as the Government changed Chancellors, one member commented that “a big thing for us is that after the mini budget, the schemes have stayed in there. This is going to make a massive difference both for entrepreneurs and investors.”

“I think everyone recognises that we’re supporting the backbone of the UK economy. Without these schemes they’d have a much harder job on their hands. They’re not going to be able to support all of these companies on their own, and that’s why these schemes were brought in.”

Another added; “The government wants the UK economy to be stronger and are entirely focussed on growth. If they want to achieve that, this is one way of doing it; supporting these companies to provide growth and jobs.”

One member was more cautious around future Government policy. “I think they will, at some point, reduce the tax relief from VCTs, looking at risk levels. But the fundamental point is that as long as the capital gets to the founders doing interesting things, disrupting the market and investing in growth, that’s the key.”

Are approved funds the way forward for EIS investments?

One of the biggest objections to the schemes is the amount of administration involved, which can be off-putting for investors. However, the introduction of approved EIS funds could remove some of the burden.

One member commented that this can be a particular issue with the traditional portfolio service. “The idea of approved funds solves this issue, but I’m not quite sure the execution is there yet, particularly from a cash flow point of view.”

Another added, “I definitely think they’re in their infancy, but so far it’s solved a lot of issues for managers who take longer to deploy capital.”