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Research rules

EISs and VCTs are viable investments but IFAs must do their research

We have seen a continued crackdown on the wealthy through different schemes such as the reduction of the lifetime allow-ance from £1.8m to £1.5m and the limiting of pension tax relief to £50,000 a year. This is down from the previous maximum of £255,000 that those earning up to £130,000 enjoyed and has understand-ably spurred advisers to look for other tax-efficient ways to help clients save for retirement.

One option is employer-funded retirement benefit schemes, which can be an extremely tax-efficient way of holding funds for a client’s retirement. However, with The Finance Bill 2011 came the news that EFRBS and clients who have money in them could be subject to admin charges of over £5,000, which would considerably diminish the size of the fund. To really seal the deal, the taxman also will now take National Insurance contrib-utions as well as income tax from the offshore “company”. When one takes into account the NI contributions taken from both employers and employees, EFRBS do not look like the att-ractive option they once were.

This brings me onto the challenge that advisers now face to find a new haven for their clients’ hard-earned money as other avenues close down. Enterprise investment schemes and venture capital trusts could prove to be viable solutions.

New rules that came in with the Budget have made EISs considerably more attractive. Not only have the schemes seen investors’ tax relief jump from 20 per cent to 30 per cent but the amount that an individual can invest will be doubled to £1m from £500,000 in April 2012. Coupled with a change in what counts as an EIS, with bigger unquoted companies (up to £15m gross assets) now included in the classification, this proposition is looking a whole lot more interesting. Likewise with VCTs, where the size of companies within the classification has increased to £15m as well.

However, due to the higher-risk exposure of these types of investments, they are certainly not for everyone and advisers need to fully research each proposition to ensure that their clients are investing in the right products. Smaller IFAs might struggle to find the resources to ensure that each facet of the scheme is fully investigated before the green light is given.

This does not diminish the fact that the Budget’s move to increase the size of companies that can come under the schemes’ umbrellas has reduced what was previously seen as high risk to a manageable size. However, this is only the case when these investments are combined with proper research and, of course, the tax break incentives. I would not be surp-rised if they become a more mainstream product for high-earning clients.

Sheriar Bradbury is managing director of Bradbury Hamilton


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