It is becoming that time of year – and I am not talking about the required office Christmas parties and dutiful time with the family. Between Christmas and New Year, we all try to do a bit of life admin. For many, this is when they realise they have capital gains they want to get tax relief on for this 2019/20 tax year, or even for 2018/19. For those with a Capital Gains Tax ("CGT") bill from last year (2018/19), Enterprise Investment Schemes ("EIS") offer an ability to get relief via a Carry-Back facility. But not every EIS in the market can ensure you benefit from this relief.
I get asked about this many times throughout the year: which managers can ensure I get Carry-Back for myself or my client? It is hard to ascertain which managers and funds offer this service (and the information is not always up to date). Now our subscribers need fret no longer: we have published our Market Insight report on the Carry-Back Facility for EIS. Moreover, we have added the ability to filter by those offering this service on our open offer page. Register here to see our subscription and upgrade options!
Following many discussions with advisers and investors, there are a number of knowledge gaps and misconceptions, with regards to EIS Carry-Back options, so here are the 12 things you need to know when thinking about using Carry-back.
- What exactly is Carry-Back?
One of the EIS benefits is that they offer the ability for investors to get EIS relief on their capital gains liability, not just in the tax-year in which they invest, but also in relation to offsetting any taxable gains from the previous year (in order to ease their overall tax burden). For example, if you invest £100,000 in an EIS which is invested before the close of this tax year, April 5th 2020, you can get 30% income tax relief and 100% capital gains deferral any gains generated in either or both 2019/20 and 2018/19 tax years.
- The Golden Rule: quality of EIS first, Carry-back second
We fully appreciate that many investors are using EIS for tax relief purposes and therefore their major consideration is whether a manager offers Carry-back or not, but not all that offer Carry-Back are created equal. Don't let tax planning alone rule where you make your investments -focus on the investment decision and the quality of the offering. Carry-Back isn't enough, alone: you need to make sure you are going to get a good return for the risk taken. Ensure you still do your due diligence and research into each offering, such as using our system AdvantageIQ to filter for options offering Carry-Back (new filter, just added!) and then use our tools and research to make sure you pick the best EIS for you; it is possible to get both quality and Carry-Back; you just need to do the research.
- Subscribing is not enough – timely deployment is key
To ensure you can Carry-Back EIS relief, you do need to sign the cheque and subscribe to your chosen EIS scheme, but the manager must also deploy your money before the close of the tax-year. You also need to make sure you pay attention to when up-front fees (such as initial charges, AMC, custodians etc.) are charged; this impacts the Carry-Back calculation. You might have to gross up your subscription amount to consider fees paid directly to the manager, compared to fees charged at the investee company level.
- Deadlines are king
If you are doing last minute shopping for Carry-Back facilities, or even thinking about it now, you need to be mindful that managers need cleared funds by a set deadline. Investments rarely happen in a day and your subscription will need to be spread across a few investee companies, for diversification and risk purposes. If you are subscribing via cheque or electronic transfer, also ensure you leave extra time for this money to clear, prior to any deadlines. On AdvantageIQ and within our Carry-Back report, we highlight all the deadlines, to help you maximize your Carry-Back potential.
- Careful: conditions may be applied
Carry-Back can have consequences. You may have to reduce the number of investee companies within your portfolio or the percentage invested within a sector or company. Closer to managers' deadlines and at tax-year end, these conditions may become even more restrictive.
- No promises
As you can imagine, managers rarely have a nailed-on pipeline, detailing exactly which investee companies you would go into at any time. Investments can be contingent on many things and even follow-on investments can have their vagaries. Therefore, ensure you manage your expectations: you might not get your full subscription amount deployed, and this will affect the amount of Carry-Back you can achieve.
- Size matters
If you or your client suddenly finds a large CGT issue requiring EIS relief and needs to write a very large cheque, always contact the manager directly, to ensure they can take a large ticket and still deploy it in time. We include the maximum ticket size in our report, but it is always best to double-check.
- Diversification is still very important
At least 40 EISs offer some form of Carry-Back facility. Don't let tax planning stop you looking into diversifying across sectors, strategies, and managers; at this time of year there will be more than one option available to you.
- Don't forget about the specialists
Specialist EIS managers might be more likely to offer Carry-Back options as they may have more niche and proprietary deal flow management – this isn't always the case, but it is worth taking a look!
- Why some don't offer Carry-Back facilities
Many managers can't offer Carry-Back (or, rather, a high level of certainty over timely deployment), owing to the investment strategy and associated process or pipeline challenges. Several funds now declare a minimum rolling 12-month deployment horizon, with some extending that to 18-24 months.
- Other options are available
If you are worried more about offsetting an income tax bill than capital gains there are other options, such as Venture Capital Trusts ("VCTs"), which, for tax planning purposes, have set allotment dates, to ensure you are fully invested in 2019/20. We published a VCT spotlight report on all VCTs open for this tax-year. In addition, there are single company EIS offerings, as well as SEIS and SITR – they may not be suitable for your client, but who ever said they didn't like to have options?
- Carry-Back all tied up in a bow
We have introduced a new Carry-Back facility filter to our EIS open offers, so all subscribers can see what options are out there. We will maintain this, throughout the year. However, we also wanted to offer our subscribers something more and, building on the success of our last Market Insight report we have published another this year, including details on all the deadlines, investee company targets, maximum subscription amounts, as well as any conditions or caveats.
So please login to your AdvantageIQ account, visit your Document Centre and, within the Market Insight folder, you will find our latest Carry-Back Facility Report.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.