Read up on the tax-efficient opportunities arising from the UK's decision to leave the European Union
If anybody witnessed my Facebook profile during June they will appreciate that I was keen for the UK to remain part of the EU. However, the voice of the nation has spoken and we now enter a new world. I have no doubt that in the long term the UK will continue to be a prosperous and enviable economy but my greatest pre-referendum fear was about the short term uncertainty. As we know, and has been proven, economic and political uncertainty bring with them market volatility and reduced consumer confidence. An example of the effect of reduced consumer confidence is that house prices are expected to decrease. This expectation is not due to reduced overseas investment (other than perhaps in certain parts of London) resulting from Brexit, as some have suggested, but rather that property prices are likely to be affected as many UK consumers stop buying and selling in order to ‘await and see’ what happens. Part of the role of financial advisers during this period will be to reassure clients and to educate as to why clients should continue with their financial plan and not let doubt affect their long-term objectives. Anyway, enough with my penguin book economics!
We should be concerning ourselves with the positives and I’m a great believer that change leads to opportunity. The fallout from the Vote Leave referendum victory means that there has never been a more appropriate time to consider tax-efficient investments for a number of reasons.Tax planning
In an uncertain world advisers might not be able to provide investors with as much reassurance about projected returns from traditional markets as they previously could. Therefore, one of the main areas where advisers can look to add value to their clients is by astutely managing their tax position. Government endorsed tax-efficient investments, such as the Enterprise Investment Scheme, should therefore be considered as part of this planning. Whether deferring or mitigating a Capital Gain, reducing an income tax liability or mitigating inheritance tax, there are numerous opportunities for tax planning using tax-efficient investments.Uncorrelated investments
As a majority of tax-efficient investments are in unquoted stocks they could offer long term protection from market volatility. All investments carry their own inherent investment risk but if you understand the underlying investee companies it could be possible to identify asset backed opportunities (such as BPR qualifying renewable energy projects) or growth opportunities which aren’t reliant on the UK or EU market. Although AIM stocks are classed as unquoted for the sake of EIS and VCT, I would suggest being wary of the correlation between AIM performance and the mainstream markets, coupled with the relative illiquidity of AIM meaning exits are rarer than mainstream markets. (This correlation with mainstream market volatility was shown with the total value of AIM All-Share falling by almost 10% during June.) EIS investments have to be held for a minimum of three years and VCTs five years, so the need to think long term can also help to reduce investors’ worry about short term factors.Supporting the UK economy
It is expected that a short/medium-term consequence of leaving the EU will be reduced investment in UK businesses, both the disappearance of EU grants and the expected reduction in overseas investment which was previously contingent on the UK being within the EU. Therefore, UK companies will need to find more investment from ‘home-grown’ sources. The likes of the Enterprise Investment Scheme may appeal to UK investors looking to support growing UK businesses and therefore it is likely there will be more companies seeking investment via EIS. This could potentially mean an increased volume of stronger investment opportunities.State Aid
The Enterprise Investment Scheme and Seed Enterprise Investment Scheme are both governed by EU State Aid rules. It has been mooted by some that once the UK has left the EU, the UK Government will be able to increase the limits on how much companies can raise under EIS and SEIS. This could be great news for such companies and, in particular, enable seed-stage companies to receive funding more quickly. However, it is likely that if the UK does negotiate a new trade deal with the EU, or some associate member role, then the UK will continue to abide by EU State Aid rules but this is worth keeping an eye on as it could mean more established businesses qualify for SEIS or EIS.
Tax-efficient investments are increasingly important for advisers to consider as part of a well balanced portfolio and the post-referendum environment could increase the appetite for advisers and investors. Advisers shouldn’t rely on investment returns to be their justification of existence to clients; rather they should firstly ensure that clients’ tax positions are managed effectively as that is where advisers can make a real difference to clients without relying on market conditions.