More than half of retail enterprise investment scheme inflows representing £367m of annual investment will be hit by the Government’s crackdown on the industry’s tax breaks, new research suggests.
New EIS and VCT tranches will not be able to benefit from two popular renewable energy subsidies alongside their inherent tax relief once the Finance Bill 2014 receives royal assent next month. Existing investments in the schemes will be unaffected by the changes.
Tax Efficient Review editor Martin Churchill collated the amounts raised by retail EIS and VCT providers in the last tax year, with EIS schemes receiving £626.8m.
Of all retail EIS money received, 62 per cent – £386.7m – went to schemes that invest in renewable energy projects. About 95 per cent of that amount, or £367m, is directed at solar and wind projects, both of which will no longer offer subsidies to EISs and VCTs.
Churchill says EIS providers will start searching for an alternative investment strategy with a similar lower-risk profile. He says: “What will come to fill the void has not yet emerged from the mist. It’s not clear that there’s something that can mop up £367m; that’s a lot of money so the jury’s out at the moment.”
Octopus Investments managing director Guy Myles says solar investments make up most of the firm’s EIS investments but he does not think the change will be detrimental to EIS investing.
Since 2011, Octopus has invested about £500m into the solar industry and it is one of the country’s largest investors in the sector. Last year it raised £114.5m through renewable EIS funds, from a total of £135.7m.
Myles says: “We have been expecting solar to be removed from EIS. We think it is appropriate and it is the right decision.”
He believes the investor demand for low-risk, capital-preserving inv-estments to manage tax bills means the future is secure for EIS investing despite the closed solar and wind avenue.
The firm is turning to “anaerobic digestion” investments and aims to help build British capacity. Anaerobic digestion produces methane from waste and, alongside hydro-electricity, makes up the remainder of EIS renewables investment
inflow. It is a relatively new technology for the UK but is used exten-sively overseas.
Myles says while not as efficient or easy to install as solar panels and more variable in site output, it is at a similar stage of development to solar back in 2011.
He says: “We see opportunities in anaerobic digestion as well as other areas. In aggregate, we think we will be able to maintain a significant EIS business.”
Foresight Group was the second-largest player in solar EIS investments last year with total inflows of £107.5m. A spokesman says: “Foresight is looking into alternative opportunities which will qualify for EIS tax relief and it will make announcements in due course.
“In the meantime, until royal assent of the Finance Bill, expected in July 2014, Foresight Solar EIS Fund 5 remains open for investment.”
Martin Churchill, editor, Tax Efficient Review
The EIS market is very buoyant at present based on three factors: adviser comfort with the product generally, the Chancellor’s pen-sion changes and the large number of new product providers.
As the figures for funds raised in tax year 2013/14 show, over 60 per cent of funds went into renewables, the majority of which was ground-mounted solar. As the scope for investing in renewables after the Finance Bill receives royal asset will be limited to just anaerobic digestion and hydro, the big question is whether similar lower-risk products will emerge. Anaerobic digestion is still at an early stage in the UK and is riskier than solar. The technology is very difficult. You have got to get it to work, whereas with solar you just set it up and walk away.