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FSA warns on VCT and EIS promotions

The FSA is cracking down on Venture Capital Trusts and Enterprise Investment Schemes that are being marketed primarily on the tax incentives offered and not highlighting the risks involved.

In a financial promotions update, the regulator says the increase in tax relief and the wider reform of the VCT and EIS sector, is likely to result in an increased demand for the products.

The changes in the 2011 Budget saw EIS receive more favourable treatment with Chancellor George Osborne increasing the level of income tax relief from 20 per cent to 30 per cent from April 2011.

From April 2012, the Government will double the annual EIS investment limit for individuals to £1m. It will also increase the qualifying company limits from 50 to 250 employees and gross assets from £7m to £15m for both VCTs and EIS. The Government will also raise the annual investment limit for qualifying companies by 400 per cent to £10m for both vehicles.

The FSA says both vehicles should promote the tax benefits in a balanced way and that firm’s must take responsibility for what appears. It says key drawbacks of the promotion to be highlighted.

It says: “We have noted EIS/VCT investments are often highly promoted on their preferential tax status. Where this is the case, the promotion must include a prominent reference that the tax treatment depends on the individual circumstances of each client and may be subject to change in future.”

“In addition, the availability of tax reliefs depends on the companies invested in maintaining their qualifying status. Please refer to the HM Revenue & Customs website for further guidance on the tax relief available on EIS/VCT investments.”

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Comments

There are 14 comments at the moment, we would love to hear your opinion too.

  1. Andrew Whiteley 13th July 2011 at 1:23 pm

    This is just getting silly. Surely the FSA must place at least some responsibility on the end investor to enquire as to the risks involved within the underlying investment! After all, 30/20% Income tax relief, tax free dividends, CGT deferral, loss relief and IHT exemption must come with some catches mustn’t it…..

  2. Its the cotton wool brigade at their best. Resposibilty is required on both parties.

    This is like saying that are car dealership advertising a high powered sports car on it’s 0to60 mph capabilities, is then reposible to advise the purchaser of the statistics and risk of high speed accidents. Much of this goes with the turf. I want one. I want the benefits , i will be mindfull of the risks i am an adult.

  3. Surely when an investor looks at an investment they are not only looking at the risk of the investment, but they are also looking at the tax advantages. After all, the investment would have to drop by a considerable value before the client is disadvantaged, due to the tax relief situation or am I missing the point here. As long as the client is aware of investment risk and that these investments tend to be classified at the higher end of the risk scale, surely there is no problem.

    It’s also worth noting that these schemes were deliberately set up by government to encourage investment in new ventures and small enterprises, so as long as the client is aware of the risk what is the problem. I think this is points towards lack qualified staff in the FSA, next they’ll be saying nobody should have a pension because there is some investment risk.

  4. The FSA’s point here is not that investors should be dissuaded from investing into EIS or VCT, but that some of the less aware or less scrupluous advisers/promoters may be promoting these investment “primarily” on the basis of the tax reliefs, without fully explaining the risks involved (investment, legislative etc etc). In other words, allowing the tax tail to wag the investment dog, rather than identifying clients who want exposure to small companies (and therefore high risk) in their portfolio and for whom EIS and VCT brings added tax advantages.

  5. I’d like to say I agree but I’ve just had a client contact us his is risk averse.

    Their client suggested that they look at VCTs as a way of making lots of money with tax advantages – they forgot to mention the risks!!!

    Yes I’m all agreeing that a client should understand what they are getting into and they should seek to understand but when you’re account tells you it’s a great idea and there is no downside the FSA are right to remind people of their responsibility to point out the down sides.

    p.s. car anology doesn’t really work because there is a national speed limit so 0-60 on a 30mph road is irrelevant. People understand the consequences if they speed and are aware of the permitted boundaries – this brings us back to an issue of education.

    Should everyone be expected to sit a money test and a take a ‘don’t trust anything you read in the media/publications’ sense check.

  6. BE WARNED – If the FSA say they are looking at this, then even if the brochures DID make the risk clear enough, it’s likely to be argued that the adviser didn’t explain it in a balanced manner. The only way to prove it, is to have a recording of exactly what was said to the client (and their response) and not just the suitability report saying it as there is nothing to prove they actually read the bloody thing and the FSA have confirmed (at last) that they know that clients DON’T read them most of the tiem anyway!
    As to the psoter where their accountant reccomended it, whilst accountants are “exempot” to incidental advice on pensions and investments, I don’t think the exemption applies when they reccommend a product and they should be reported to the FSA as acting without FS approval

  7. FSA warns on this product, FSA warns on that product. A quick “find” in my outlook and there’s well over 50 instances this year warning uf on products, sales practices, risk profiling tools and on and on and on.

    Fair enough, but they didn’t warn me not to put me todger in a fan heater did they? Why not? We should be told.

  8. At the risk of stating the bloomin’ obvious, if you’re going to recommend a tax-efficient product then you need to be able to demonstrate you understand your client’s tax position. I’ve seen these ‘shotgunned’ out to a HNW client base on the basis that those people have money to invest rather than they are in a position to benefit from those tax breaks.

  9. So I have a client with a £150,000 CGT bill and I advise them to put £150,000 into an EIS instead of paying the bill. What’s the risk ? If they pay the bill they lose £150,000. Am I missing something or do the FSA not understand that these are primarily tax planning tools ?

  10. Andrew Whiteley 13th July 2011 at 4:53 pm

    @anonymous 4.45pm

    You have just highlighted the risk!!

    You have to invest the total gain not just the tax due to defer the client’s full CGT liability….

  11. Andrew – If Anonymous 4.45 really has misunderstood the rules as the post suggests, then I fear this alone night be seen to justifiy the FSAs concerns.

  12. @anonymous 4.45pm

    that is very worrying agree with you Andrew Whiteley

  13. Anonymous 4.45 here, don’t panic all, I did of course mean a £150,000 capital gain. Nice to see some are on the ball out there.

  14. This is pretty concerning as a development. The future of the UK ecomony is in being able to innovate and develop. Sadly regulators appears incapable of working within such a framework such that they wish to stiffle all innovation. If this continues, then financial planning becomes commoditised and delivered from offshore. The FSA needs a wake-up call to the detrimental effects that over regulation can have in any market.

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