In the light of an eventful and unusual year for fundraising, Tom Hopkins & Richard Hoskins of Kin Capital consider what we could read into emerging trends for the new year of tax-efficient markets
The 2017/18 tax year was one like no other for VCT and EIS fund managers and perhaps one many will be glad to see behind them.
On the other hand, perhaps many advisers will be looking forward to a new year on a level business playing field.
Last tax year brought the dual beasts of MiFID II and significant rule changes to the tax-efficient investment industry.
The year 2016/17 saw strong inflows into EIS and VCT, with the latter delivering the second-highest rate of inflows ever recorded, as relevant pension rule changes began to bite.
Market under review
But as the 2017/18 tax year unfolded we saw the launch of the consultation on the Patient Capital Review.
This created a ‘buy now while you can’ sales frenzy that was in full force for many VCT and EIS funds who feared their investment strategy would be affected or tax reliefs would be shredded.
Though these fears were ultimately unfounded in some cases, particularly VCTs where tax reliefs remained untouched, the result was an unprecedented level of cash raised in the historically quiet pre-Christmas period.
VCT fundraising hits decade high
According to Wealth Club VCTs raised around £728m in 2017/18 which compares with £542m in 2016/17 and is the second highest level on record, second only to 2005/6 when investors ploughed a record £779m into VCTs as tax reliefs decreased. Total VCT assets under management at 5 April 2018 were £4.3bn, up from £3.9bn the previous year.
Several VCTs closed early and the window for VCT investing certainly felt a lot shorter than previous years, as investors piled into VCTs pre-Budget, thinking that tax reliefs may alter.
Of course with large fundraisings of course come questions over deployment, deal flow and cash drag. In the new tax year, cash ratios will become far more important to advisers choosing VCTs for their clients.
EIS: going for growth
According to research firm Tax Efficient Review the trend, as expected, is towards growth. Investments into growth focused funds were up on the previous year. Although ‘limited life’ funds raised significant amounts in the run up to the Budget.
The rise of growth reflected the rule changes and lack of alternative products but it is also more an acceptance that, if clients want EIS exposure, they have to take on more risk. Again, this should be good news for UK PLC.
This coincided with a realisation that some growth funds are delivering the returns whereas the so called ‘lower risk’ funds were higher risk than positioned with investors.
So what next?
The market has changed – the new ‘risk to capital’ condition for EIS and VCT has increased the risk profile. Some investors will not be prepared to take the risk so we might see an overall fall in the EIS/VCT market in 2018/19.
From our side at Kin Capital, we see three potential changes in the market:
Firstly, the potential creation of a new Approved EIS fund structure, which might open up growth investing to a whole new subset of investors as reduced administration and clearer tax planning will assist the financial advice process.
Secondly, VCTs will have more pressure on deployment under the rules and this might impact fundraising for this tax year. This might result in new entrants entering the market, with one already announced this tax year. Advisers might have to make decisions earlier than usual to avoid missing out as VCTs close early.
Thirdly, with some sounding the death knell for ‘asset backed’ investment, advisers may need to re-educate clients to think of EIS and VCT as being synonymous with growth, and that generous tax reliefs require capital to be at risk, but that the returns can be attractive regardless of the tax benefits.
EIS and VCT clarity
Whilst it will take time for the new rules to bed in at least the uncertainty over EIS and VCT has gone. And it has been extremely positive to see the Chancellor recognise the valuable role of EIS and VCT funds in the UK economy.
The government wants more of this capital to focus on growth investments. For advisers this unfortunately might require more research on funds, and education of clients, but the move is good for growth managers, positive for investors will want a growth kicker and great for UK Plc.