The important role an EIS can play within a modern investment portfolio

Oxford Capital
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The important role an EIS can play within a modern investment portfolio

Tax efficiency, diversity and investment returns are three of the key factors that investors look for from their existing investment portfolio. But are investors missing a trick by not considering an Enterprise Investment Scheme (EIS) as part of their portfolio. Recent research suggests that only around 30% of financial advisers make use of tax advantaged investments such as EIS – are the other 70% missing a trick by not making use of them, and are their clients missing out on what can not only be a great diversifier, but also an incredibly effective tax planning tool?

EIS can be a great diversifier. Traditional investment funds will not provide investors access to early-stage companies, and through an EIS an investor can access investments into some of the newest, most vibrant and exciting companies the UK has to offer. They have minimal correlation to global stock markets too – they are less likely to be affected by economic shocks or significant falls in global stock market indices. 

EIS can provide investors with the potential for significant capital growth, but unlike traditional investments such as shares and fixed interest, the returns will be based on the growth of the business, and increase in the value of the underlying companies, rather than dividend and income payments, which has provided the majority of investment returns for decades, particularly in the UK. There is a long history of EIS funded companies making their investors outstanding returns on investment, but this shouldn’t take away from the fact that they are, and always will be high risk investments. Therefore, it is important that any investor who considers EIS has the correct risk profile, capacity for loss, and doesn’t envisage needing access to their funds for the medium term (5-7 years), as EIS shares are unquoted, and therefore illiquid.  An EIS should be viewed as something to compliment an existing portfolio, not something to replace it.

So how can an EIS compliment an existing portfolio? As mentioned, it can provide diversification, and the potential for increased investment returns, but the biggest benefit when considering its place within a portfolio is the tax reliefs on offer, and how they can interact with an investor’s existing investments.

Some investors will be happy with the tax efficiency afforded to them through tax-free ISAs and annual CGT allowances. However, when an investment portfolio or a gain reaches a certain size, these tax breaks simply don’t cut it anymore. No other investment in the UK offers the generous tax benefits afforded to EIS investors:

  • Income tax relief: 30% on up to £1m invested, increasing to £2m if at least £1m is invested in “knowledge intensive” businesses. Putting it simply, if you earn £100,000 per year and invest £50,000 in to an EIS, once you have received your EIS3 certificates you would be able to reduce your income tax payment by £15,000.
  • Capital Gains Tax deferral: A CGT liability can be deferred indefinitely if invested in to an EIS. This gain could have occurred up to 3 years before or 1 year after the date of EIS investment. This relief can be of significant benefit to an existing portfolio of traditional investments – a portfolio of direct shares, funds or property that has benefitted from significant growth will be liable to CGT. While investment growth is great, the amount of CGT payable on the gain can make some investors reticent to liquidate their holdings, so deferring via EIS can be a very attractive option.
  • Tax free gains: All gains on EIS investment are tax free if the investment is held for at least 3 years.
  • Inheritance Tax relief: The underlying assets in an EIS qualify for Business Relief (BR), which means that after holding the asset for 2 years they will become exempt from IHT if the investment is still held upon death.
  • Loss Relief: Significant downside protection, which provides relief at the investors marginal tax rate after initial income tax relief. EIS losses can be offset against either CGT or taxable income. The UK government is effectively underwriting a large chunk of downside risk – the maximum loss an additional rate taxpayer can incur is 38.5% of their invested capital. Again this benefit can be used to help deal with a capital gain from another asset in an investors portfolio.
  • Business Investment Relief (BIR):A UK resident/Non-Domiciled investor can make use of offshore funds to invest in to EIS without having to pay the remittance charge.

In summary, an EIS offers:

  • Greater tax efficiency, not just within the EIS itself, but for an investors overall portfolio
  • Greater diversity, an asset class and companies not available within traditional funds
  • Potential for improved investment returns

For more information on the Oxford Capital Growth EIS, click here.

British Airways owner posts loss, shares fall

Safiya Bashir
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British Airways owner posts loss, shares fall

The owner of British Airways, IAG, reported a €2.6bn (£2.3bn) for the first nine months of 2021.

Shares in IAG fell 3% this morning as it also predicted full-year losses to hit €3bn. In the three months to the end of September were just 43% of pre-pandemic levels.

However, the UK-US flights are set to open on Monday, which will boost passenger numbers.

“The full reopening of the transatlantic travel corridor from Monday is a pivotal moment for our industry. British Airways is serving more US destinations than any transatlantic carrier and we’re delighted that we can get our customers flying again,” said  Luis Gallego, IAG boss.

“We continue to capitalise on surges in bookings when travel restrictions are lifted.”

Richard Hunter, from Interactive Investor, commented on the airlines results: “Cash operating costs for the third quarter were €260m per week, underlining the need for the airline to return to some kind of normality as soon as possible. A cocktail of borrowings which have been necessary to keep the company afloat has resulted in a net debt figure which now stands at €12.4bn”.

Inflation expected to hit 5%

Safiya Bashir
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Inflation expected to hit 5%

The Bank of England has predicted that inflation will rise to 5% over the next year.

UK wages will not be able to keep up with inflation, leading to struggles for households across the country.

Bank of England governor Andrew Bailey told the BBC: “I’m very sorry that’s happening. None of us want to see that happen. Inflation is clearly something that bites on people’s household income. I’m sure they’re already feeling that in terms of prices that are going up.”

Currently, inflation is ahead of the Bank of England’s 2% target at 3.1%. It is predicted to rise to 5% by next April.

Economics professor at Dartmouth College in the US criticised the Bank of England for the predictions. He said:

“We have no historical precedent for what’s happened. We’ve never seen a shock of this kind and the big thing we are seeing at the moment is the furlough scheme is coming off, there is going to be an increase in taxes on National Insurance [and] universal credit was just cut.

“So, the central bank really hasn’t a lot of clue what is going on. This is a really big uncertain world and everybody should tread cautiously. I’m afraid I have to say… you have to take what the governor of the Bank of England and the Monetary Policy Committee said with a very large pinch of salt.”

House prices jump 0.9% in October

Safiya Bashir
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House prices jump 0.9% in October

House prices jumped 0.9% in October, according to Halifax.

It’s the fourth monthly increase in a row and house prices now cost an average of £270,000 in the UK.

“One of the key drivers of activity in the housing market over the past 18 months has been the race for space, with buyers seeking larger properties, often further from urban centres,” said Russell Galley, managing director at Halifax.

“Combined with temporary measures such as the cut to Stamp Duty, this has helped push the average property price up to an all-time high of £270,027. Since April 2020, the first full month of lockdown, the value of the average property has soared by £31,516 (13.2%).”

“First-time buyers, supported by parental deposits, improved mortgage access and low borrowing costs, have also helped to drive price growth in recent months.”

“First-time buyer annual house price inflation (+9.2%) is now at a five-month high, and has pushed ahead of the equivalent measure for homemovers,” he added.

Galley also predicted that the housing market could cool if inflation is to rise, saying: “With the Bank of England expected to react to building inflation risks by raising rates as soon as next month, and further such rises predicted over the next 12 months, we do expect house buying demand to cool in the months ahead as borrowing costs increase.”

New AIM admission: Devolver Digital rides video games boom

Andrew Hore
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New AIM admission: Devolver Digital rides video games boom

Devolver Digital Inc is the latest video games publisher to join AIM. The Delaware-based company’s focus has been indie games produced by third parties. The relationships with developers are important the success of the business. More recently Devolver Digital has acquired games developers and brought IP in-house.
One of the attractions of Devolver Digital is that has built up a catalogue of games that generate revenues for many years and it is not dependent on a blockbuster title. Historically, the back catalogue has generated around three-fifths of revenues. Fall Guys was a significant succe...

Purplebricks hit by lack of supply in housing market

Andrew Hore
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Purplebricks hit by lack of supply in housing market

Estate agency Purplebricks (LON: PURP) warns that trading has been weak in the second half, while the cash that has been helping to underpin the valuation has fallen.
First half trading has been disappointing. There is still strong demand for housing, even though the stamp duty holiday is at an end, but there are fewer owners wanting to sell. New instructions are 23% lower than the first six months of the previous financial year. The number of instructions in the period was around 22,000, down from 35,387 in the comparative period.
Revenues will not be as high as expected and costs are in line...

House builder shares jump on rates surprise

UK Investor Magazine
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House builder shares jump on rates surprise

House builder shares listed in London jumped after the Bank of England voted to keep rates on hold, surprising the markets that expected a rise in rates to fight inflation.

House building shares such as Taylor Wimpey, Persimmon, Berkeley Group Holdings rose following the announcement as investors looked forward to further support for the UK housing market through lower rates.

“House builders were among the stocks to make immediate gains on the announcement with Taylor Wimpey, Persimmon and Barratt Developments also up by more than 2%. With no splash of cold water imminent to cool down the red hot housing market, the expectations are that demand for new homes will continue to be brisk as the race for space continues,” said Susannah Streeter, Senior Investment and Markets Analyst, Hargreaves Lansdown.

Whilst house builders investors will welcome the news, banking shares fell as the prospect of higher net margins disappeared.

Analysts pointed to the inconsistency of inflation data as reason why the Bank of England held of raising rates for the first time since the pandemic.

“No doubt some will characterise this latest decision as the Bank bottling it, but there are pretty sound reasons to hold off on hiking rates right now. The Bank’s judgement that inflation is transitory hasn’t really been tested, as it’s only six months that CPI has been marginally above target, and in fact the inflation index fell back at the last reading,” said Laith Khalaf, head of investment analysis at AJ Bell.

“Although inflation is now predicted to peak at 5% next April, the data is notoriously unreliable at the moment, thanks to the distortions created by the pandemic, and a synchronised emergence from it in Europe and America.”

Sterling sinks as the Bank of England keeps rates on hold

UK Investor Magazine
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Sterling sinks as the Bank of England keeps rates on hold

The Bank of England voted in favour of maintaining rates at 0.1%, surprising markets thats had been expecting the Bank to take action against raising inflation.

“The BoE has voted by a majority of 7-2 to keep interest rates at the current level of 0.1%. Many were expecting a hike today in the face of rising inflation but the decision is quite finely balanced,” said Dan Boardman-Weston, CIO at BRI Wealth Management.

Sterling fell as low as 1.3545 against the dollar in the immediate reaction to the decision as traders unwound positions that were hoping for a more hawkish Bank of England.

With inflation soaring, Manny had expected the BoE to move to bring price increases under control. However, with a vote of 7-2 in favour of keeping rates on hold, MPC voters clearly choose to help preserve the increasingly fragile economic recovery.

“Inflation might be rising, but the BoE is right not to consider an interest rates hike as a silver bullet to this problem. Labour data is crucial, and by deciding to postpone hiking rates, the MPC is likely waiting for more jobs data to become available following the end of the furlough scheme,” said Giles Coghlan, chief currency analyst, HYCM.

“Raising rates right now would risk harming businesses’ recoveries. It would also discourage people to spend their pent-up savings. All of this would damage the UK economy’s post-pandemic recovery and could result in ‘stagflation’, where inflation rises but the economy stagnates.” 

Wizz Air sees strong growth in passenger numbers

Safiya Bashir
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Wizz Air sees strong growth in passenger numbers

Passenger numbers for Wizz Air are growing and the group is set to be back on pre-pandemic levels.

Revenue in the second quarter of 2021 jumped from €471.2m to €880.4m thanks to a growth in passenger numbers by 92.7%.

Wizz Air’s chief executive Jozsef Varadi, commented: “Close to 10 million passengers booked a Wizz Air flight in the quarter with load factors around 80 per cent for the quarter and reaching 84% in August as our capacity peaked at 98% of 2019 ASKs in the same month.”

“Our revenue performance was 79 per cent better than last summer and ex-fuel CASK in the second quarter continued to normalise and was only 12 per cent higher compared to pre-pandemic levels.”

“As a result, we delivered an operating profit of €57m for the quarter. We closed the quarter with €1.7bn of total cash, highlighting our ability to manage liquidity well and continue to maintain our investment grade rating.”

Virgin Money posts strong pre-tax profits

Safiya Bashir
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0
Virgin Money posts strong pre-tax profits

Virgin Money has said that it is expecting pre-tax profits to jump 546% to £801m.

Pre-tax profits at the group is expected to be £417m for the year, which is a jump of 10.2% compared to the same period last year.

New customer sales rose 95% while personal lending increased 4%. The group has said in a trading update that “Strong financial momentum” means that it is on track for impressive full-year results.

Chief executive officer David Duffy commented: “As a result of Covid, the pace of digital change has accelerated with multi-year developments now achieved in just one year. Competition is increasing and customer expectations are rising rapidly.”

Virgin Money is expected to declare a final dividend of 1p.

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