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HMRC say EIS & VCT investments too low risk

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Thursday July 24, 2014 at 5:12pm
I’ve always been a fan of Venture Capital Trusts (VCT) and Enterprise Investment Schemes (EIS).Once you realise they offer 30% tax relief, tax free dividends and tax free growth who wouldn’t be? Unfortunately, HMRC has just woken up to the low risk nature of some of the underlying investments. It’s not too late however if you want to take advantage of these benefits.

How EIS investment works

Let’s say you invest £10,000 into EIS, you will receive tax relief of £3,000, thus making the net investment cost to you £7,000. Assume the investment grows by a very modest 5% over 3 years thus returning you £10,500. Divide this by the net investment amount and you will see you have received a 50% return on your money (£3,500/£7,000).

A low risk investment

Well that is exactly how clients' lower risk EIS and VCT investments work, and therein lies the problem. You see HMRC, as an agent of the government, give such generous tax breaks because they want to encourage investment in high risk, difficult to fund ventures. So there is an anomaly with an EIS or VCT investment being intrinsically low risk. Lower risk investment has been achieved in the past by investing primarily in renewable energy, the bulk of which is solar power. This is a relatively simple business model based around companies that take agricultural land or roofs of large commercial units and install solar panels. These are connected into the national grid and during the daylight hours they generate electricity creating a return for investors. For as long as we consume electricity these investments will make money.

HMRC stop solar investments in tax advantaged investments

Because the business model is so lucrative the government has woken up to the fact that such investments are probably not suitable for tax advantaged treatment as investors will probably invest in them anyway. However, there is still a strong demand for low risk and tax relief on investment and the industry has not been slow to find the next best thing to meet this demand. The latest investments include anaerobic digesters which produce saleable fertiliser from food waste. However my favourite are small scale hydroelectric plants.

Unfortunately this is a finite resource. Small scale hydroelectric schemes involve taking water from a mountain river and diverting it down a steep hill through a progressively narrowing pipe. The ensuing jet of water is used to drive an electric turbine thus generating electricity sold to the national grid. The advantage is the technology is well known and is simple and relatively low cost to implement. It is also eligible for EIS and VCT. The down side is there is limited supply of upland streams which can be diverted for such use. Many Scottish land owners have already signed up to such schemes and so demand is outstripping supply.

So there are still such investments available but like solar we expect the supply to be finite. If you are interested in the lower risk tax advantaged investments act sooner, rather than later. I’m always happy to discuss the best current opportunities for tax efficient investments, just give me a call.

Andy Parker
Chartered Accountant and Chartered Financial Planner

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Parker Chartered Accountants and Financial Advisors is the trading name for PLW Advisors Ltd (Registered No. 10396831), and Parker Financial Planning LLP (Registered No. OC347027). Parker Financial Planning LLP is authorised and regulated by the Financial Conduct Authority. All companies are registered in England and Wales – registered office contact details here