16th August 2019

In my previous blog I covered some of the unintended consequences from the changing of pension rules, specifically the NHS ‘consultants crisis’ and more widely on the disengagement caused by layers of pension complexity.

Government figures and independent research have highlighted that thousands of people have already paid too much into their pensions. The resulting breaches in annual and lifetime pension allowances amount to hundreds of millions of pounds that will attract penalties.

With tighter limits on annual and lifetime pension allowances, a freeze on the IHT threshold until this year, increasing numbers of investors and advisers are looking at tax efficient investment options like VCT and EIS.

However, the investment process can be complex and the underlying high risk assets can be difficult to assess – they are often unquoted or can only be accessed through investment managers who may be reluctant to disclose their track records.

When considering options it is helpful to split the tax-advantaged universe into two key investment objectives, defined in relation to the underlying assets.

Capital Preservation & Growth

It should be noted here that ‘capital preservation’ is an aim of this strategy and by no means a guarantee – indeed any investment into smaller companies will be deemed as high risk.

Investments designed with capital preservation in mind are often backed by contractual income streams, low technology risk and a counter-party with a high credit rating. Energy generating companies will often meet these criteria, but with effect from July 2014, these are no longer available to use in conjunction with SEIS, EIS or VCT.

Another popular alternative investment category contains mainly asset backed investments. These often include consumer businesses with significant tangible assets, such as pubs and restaurants, which can benefit from a modest annual growth in eating out, even in recessionary periods. Ultimately, if the business fails, the bricks and mortar can eventually be used for a different purpose, potentially providing downside mitigation.

Growth

Investments comprising small companies run by entrepreneurs that can identify high growth areas of a business where they have experience. They have ambitious plans to corner a high share in the early stages of a potential new market segment. Funding for such enterprises is not necessarily cheap or easy to obtain, hence the generous tax incentives offered by the government to attract private funding for small companies.

Whilst always considered high risk, investment in the right companies can yield attractive returns.

The underlying investments may be established and profitable business seeking funding for expansion in an existing rather than a new market. At the other end of the spectrum, it may be a younger pre-profit company seeking growth capital.

In my next blog I will cover the tax treatment on a range of tax efficient investments.

Alternative investments are not suitable for all investors. Potential investors are strongly recommended to seek expert independent financial and expert tax advice before investing.

If you wish to discuss how any of the above relates to your circumstances, please get in touch and we will be happy to assist.

Barra Gorman APFS

Chartered Financial Planner

Independent Financial Adviser