Tax & Trusts

046 | Understanding VCT and EIS

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  • Odi Lahav, Chief Executive Officer, Allenbridge
  • Andrew Sherlock, Partner, Oxford Capital

Learning outcomes:

  1. Outline why and how the government has encouraged the development of VCT and EIS
  2. Identify the main tax breaks available on VCT and EIS
  3. Identify the investment risk-reward characteristics of these products

EIS Association website

Allenbridge website

Oxford Capital website

HMRC website


Tax & Trusts
Learning outcomes: 1. Outline why and how the government has encouraged the development of VCT and EIS. 2. Identify the main tax breaks available on VCT and EIS. 3. Identify the investment risk-reward characteristics of these products. Tutors on the panel are: Andrew Sherlock, Partner, Oxford Capital Odi Lahav, Chief Executive Officer, Allenbridge How VCTs and EIS complement pensions and Isas Well, Andrew Sherlock, we’re talking about tax planning products, but many people will say we’ve got ISAs, we’ve got pensions, why do we need anything else? ANDREW SHERLOCK: Well I think that’s a good question. In terms of the pensions, the limits are coming down quite substantially or have come down quite substantially and some people are capped out in terms of the total pension pot or they’re capped out in terms of the contributions that they can make, and ISAs clearly have limits too. They’re very useful as part of an overall tax efficient investing strategy, as part of their overall investment strategy, but I think that EIS and VCTs and BPR offers can offer something different. They have slightly different tax reliefs, they have tax reliefs on the way in and on the way out, and can be very useful in planning an overall strategy in terms of tax relief and also inheritance tax planning. PRESENTER: Odi Lahav, to pick up on that, what would you add to the points Andrew made? ODI LAHAV: Just basically the orders of magnitude are quite different as well. I mean you’re looking at around £15,000 in an ISA, like £40,000 now in a pension which is locked in until retirement as well, whereas the EISs are a million pounds now and VCTs £200,000, and if you include in there business property relief, you know, sky’s the limit really. But they are very very different things and they are, as usually, grouped into higher risk categories. So when you are structuring, if you’re doing it from a tax planning perspective, you do need to consider the investment part of it as well. PRESENTER: Andrew? ANDREW SHERLOCK: No, I would say that, absolutely right, they are very different animals and with a very different risk profile, and I think typically these are to enable people to invest in slightly higher risk, slightly higher return opportunities, and the government incentivises people to invest in these areas in order to try and breathe life into smaller UK companies or channel funds into areas where they feel that they need to kick start investments, such as renewable energy. PRESENTER: But, as a rule of thumb, should you look to use all of your ISA and pension allowance first before considering these other areas like VCT and EIS or is it not quite as simple as that? ANDREW SHERLOCK: I don’t think it is quite as simple as that. I’m not an adviser, and I would always recommend getting proper advice from a financial adviser, but no I think it depends on individual circumstances. I mean some of these, if there’s particularly an inheritance tax planning issue then clearly it’s possibly helpful to look at some of the BPR-type offers or even EIS, which has inheritance tax planning reliefs too. UK demographics and the implications for IHT planning PRESENTER: Well we mentioned inheritance tax a couple of times, Odi; why is that becoming such a big issue at the moment? ODI LAHAV: Well I think it’s probably always been a relatively large issue. It’s just that the toolkit of how to deal with that has expanded as HMRC have shifted their rules. But I think importantly as well if you look at the demographics today and the baby boom is getting to certain ages, also the difference in wealth between that age group and the 60s and 70-year-olds and the age group now entering the workforce in their 20s, there’s been quite a lot of research done to show that today’s new generation of workers don’t really have the wealth. At the same time those who brought real estate, which 30 years ago if you’re 60, 70 years old, maybe even 40 years ago, the amount of wealth that’s been created just from residential real estate pots, let alone other investments through the economic booms that we’ve had in the last few decades, have just meant that there’s a huge amount of wealth that at some point inheritance tax will become a real issue for them. So those who were thinking ahead are planning ahead. ANDREW SHERLOCK: Yes, I mean just to back that up I think that one in ten estates currently are above the nil rate band, which has obviously been frozen for quite some time. The estimates are that in five years it’ll be double that in terms of penetration. In fact, sorry, it’s 1 in 20 rather than moving to 1 in 10, so twice as many estates will be caught by the IHT nil rate band. ODI LAHAV: I think you can probably find a parking space in Chelsea which gets you to the point where you’ve already hit the nil-rate band, so it’s come to that basically. HMRC’s attitude to VCT and EIS PRESENTER: But, Andrew, if you’re an adviser, there’s quite a lot in the news at the moment with people’s tax arrangements coming under quite a lot of scrutiny, what’s the difference between legitimate tax planning and something that could end up in the press? ANDREW SHERLOCK: Well I think it’s important to be very clear, and one of the advantages of EIS and VCTs are that there is a box on your tax return that says I would like to claim an amount for an EIS investment or a VCT investment. And the process of going to HMRC, for EIS, is that you go to HMRC, say we’d like to invest in this particular company or this particular project, this is how we’re going to do it, is that okay, does that qualify for EIS? The Revenue then give you what’s termed advanced assurance, which says yeah that’s fine - and if they do say that we then invest. So we and the industry I think more generally will only invest in things that already have been approved by HMRC and there has never been an occasion where they have reneged on that approval as long as you do what you say you should be doing. PRESENTER: So the key thing it’s not decided on by the Revenue whether or not it’s qualifying at the end of the period, it’s decided in advance. ANDREW SHERLOCK: Correct, and as long as you follow what you say you’re going to do and do what you say you’re going to do in the way that you say you’re going to do it, which you would, then yes correct. PRESENTER: Well, I mean, looking at this from the HMRC’s perspective then, why does the Revenue and why does the government like VCTs? Why do they want to keep them going over years to come? ODI LAHAV: Oh that’s a risky thing to do to put words in the HMRC’s mouth. No, seriously though I mean they’ve been supporting these things for quite some time. I mean in the case of business property relief back in the 1970s EISs have been around for 20 years and in their previous form the business expansion schemes VCTs have been around for 20 years. Why does the government want to do it? It makes a huge amount of sense. They want to support small businesses in the UK, help provide capital, get private investors to fund these investments and create more jobs, create prosperity and increase GDP. And if you look at the employment statistics in the country, if you look at the number of individuals who work for smaller companies, the amount of GDP that is generated by smaller companies, it is fundamentally important. So if the government, then if HMRC can help drive capital to these areas it makes a huge amount of sense for them, I think. ANDREW SHERLOCK: I think also the statistics are from HMRC that if you aggregate, as you rightly say in terms of employment and so on, if you aggregate the income tax, the corporation tax, the VAT, the national insurance, the saving on benefits that come from these investments, actually the payback time is extremely quick. VCT investment mandates and tax breaks PRESENTER: But just focussing on VCTs again for a moment, Odi. I mean is there a danger that the industry tries to game the system. It sets up vehicles that are perhaps not as high risk and into smaller companies as the government originally intended and to some point there might be a bit of a push back. ODI LAHAV: There is always that risk and people innovate and they try to capture, I suppose, if you look at it from an asset management perspective, you’re always trying to capture what will be popular with your underlying investors, whatever will sell, and hence the types of businesses that you can fund and the types of structures that you can create on behalf of investors. So there is absolutely that danger and in the past you’ve seen people definitely crossing a line in terms of what was philosophically intended by the government when they created the rules versus people following the letter of the law but not really the principle. There is always a risk, but if you look at past precedent, what the government has typically done is just, if there has been a little bit of abuse, they close that hole. So enhanced share buybacks is an example where you could sell the entire VCT and then everybody could just reinvest in a new VCT and get the tax break again while investing in all the exact same companies, that’s been done, it’s been closed. So the government has tweaked the rules to ensure that people follow, so that the letter of the law and the principle of the law if you will are exactly the same. So I think the risk that the government will step in and say well no more of this stuff and we’re retroactively going back and changing things I think is extraordinarily low at this point. ANDREW SHERLOCK: I would agree completely. I think the government have got much better in their mechanisms for controlling it, both in terms of the advanced insurance that we talked about, because they’ve changed, as you rightly say, from a rule-based regime to a principle-based regime. So there’s a sort of smell test that they can apply to allow or not allow these things. You can’t apply, there’s no rules to apply specifically to whether or not something is allowable or not generally. So they’re much more able to control it, and they’ve done that with solar and renewable energy and so on very effectively. ODI LAHAV: Absolutely, in EIS space absolutely, yes. PRESENTER: But at Allenbridge, Odi, I mean you run databases of all of these EISs, VCTs, as part of your compiling that information, as part of the ratings you give, I mean do you take a view on whether somebody’s going a bit close to the wind? ODI LAHAV: Do we take a view? I mean we probably pointed out, I mean where a couple of VCTs have fallen foul of the specific rules, because VCTs are a little bit more rules based than EISs. They’re a little bit different in that respect, but the rules are you have to have a maximum investment size of 15, for example, and non-qualifying investments as part of your portfolio could be up to 30% but no more, and if you breach either of those rules, either the single investment or the 30%, then you might have a real problem and the government could step in and say okay tax benefits all gone for you VCT manager and for your investors. So we do do that and we will point out what our top holdings are, albeit that in VCT land you can get that as public information. We’ll point that out in our research. We consider it in the ratings, but really our ratings are really aimed much more looking at these things as investments and portfolios of investments, whether they’re good quality or whether or not they’re diversified, whether or not they have any particular biases, whether the manager is doing a good job as an asset manager, if you will, rather than being opining on whether or not they’re sailing a bit close to the wind. We’ll point it out in the report, but we don’t really evaluate it as such. The development of EIS since 1994 PRESENTER: Okay, well let’s move on to EIS and, Andrew, we’re talking about EIS being around about 20 years now. Again, why does the government like it so much, where’s the proof that they’re backing this as a concept in the long term? ANDREW SHERLOCK: Well, you’re absolutely right, it’s been going since ’94 and, as Odi said, there was a predecessor before that. They like it, because it’s an ability to channel money into areas which they want money to be channelled into, so smaller companies, UK growth companies and then, as we touched on earlier on, renewable energy, they wanted to get the penetration levels of renewable energy up. They used EIS as a vehicle to buy from the developers as a stopgap before the institutions then got comfortable that actually these things were sensible and generated a sensible return. I mean I think it’s interesting and I’ve got a slide which I think might help in terms of the evidence that the government have been actively supporting it, and you’ll see that four years ago they increased the relief for EIS from 20 to 30%. They, subsequently, over the next few years have done numerous things to try and encourage people, or the attractiveness of EIS, so they doubled the amount that an individual could put into EIS from £½million to £1million, they increased the amount that a company could receive from EIS sources from £2million to £5million, and most importantly they widened the pool of companies that could be attracted to EIS by extending all of the different limits, and then subsequently they’ve excluded it from various other bits of legislation that might have dampened some of the enthusiasm, such as income tax loss relief caps. Anyway, all of that, lots of detail as you can see, but I think it shows the genuine belief that the government has and successive governments have had of different flavours. PRESENTER: And you mentioned there the government encouraging money into certain parts of the economy, renewables, but I mean they encouraged solar investing for a while and then aren’t encouraging it as much now. So, when they decide to turn that tap off, how much notice did you get in that case? ANDREW SHERLOCK: Well they did it very responsibly and likewise on the renewable energy subsequently, so solar we were told at around March/April time that… PRESENTER: Was this 2014? ANDREW SHERLOCK: This was 2014 that July, or by the time that the Budget got Royal Assent, which was mid-July, it would no longer be permissible to combine solar and the government subsidies with EIS. So that was a sort of three to four month period. And also the technical detail is that you could invest in underlying companies, as long as the shares were issued in the EIS company, you could actually invest in the asset, subsequently, under the rules within two years at a push, but it was a very sensibly managed transition, and likewise in December we found that renewables are no longer allowed as from 5th April. So I think they’ve been very responsible. PRESENTER: So existing money which had gone in in good faith was fine, but they gave you warning that they would be cut off point after which new money essentially didn’t… ANDREW SHERLOCK: Absolutely. An introduction to Business Property Relief (BPR) PRESENTER: Yes. Well, we’ve talked a lot about EIS and VCTs, but, Odi, what about business property relief, BPR, again why is the government keen on providing that? ODI LAHAV: I think it’s exactly the same thing as we talked about in terms of EISs and VCTs; it’s promoting investment in small and medium sized companies in the UK, and so it just again helps to build the economy. So, if you have a lot of capital, you are in your later years of life, which as we know from a demographic perspective we talked about a little bit earlier is happening right now with a big proportion of the population, and that’s where a lot of the wealth sits, to take some of that wealth and distribute it in such a way that you are able to fund new businesses and fund small businesses across the UK, which will then subsequently employ people, pay more taxes etc., just makes a lot of sense for government. PRESENTER: And in a nutshell how do the tax breaks on BPR work? I know it’s quite a complex area and I know we’re going to go into taxation in a lot more detail in some of the subsequent programmes in this series but just… ODI LAHAV: I think the one really important aspect of BPR is that you don’t know whether HMRC is going to give you the tax relief until the point where the event has happened, somebody’s passed away and the estate has been handed down. So unlike EIS where you have advanced assurances, and you talked about all VCTs where you know upfront exactly what relief you’re going to get, then you know your dividends are going to be tax free etc., you don’t know that with BPR. So it leaves to some extent a little element of chance or an element of potentially rules changing, and as you said the devil is in the details. Different kinds of businesses will have different type of relief, although the relief is quite substantial if you do comply with all the rules and if you don’t have particular aspects of your business that might not get as much relief as others. PRESENTER: Okay, so it’s one you really have to dig into the individual circumstances of perhaps. ODI LAHAV: It is, and I mean we’re talking about these things as though each BPR, each EIS is effectively a company, you know, and the products out there that are in the market are really mainly portfolio services companies. So if you’re a financial adviser and you’re looking to make investments in these, and you’re looking to do that in a more diverse way rather than in specific companies, you’re going to go for a portfolio of companies. And so yes you need to be specific about the underlying companies, but you also need to think about very carefully your investment manager or portfolio manager who’s offering you the portfolio service what they are doing when they are constructing a diverse portfolio for you. How the tax breaks work on EIS investing PRESENTER: And again sort of the top-down view without going into lots of the detail, but how generous are the tax breaks on EIS? ANDREW SHERLOCK: I think extremely generous. If I talk through the slide, there are five different reliefs. One is income tax, where you get 30% of your money back that you’ve invested; you can defer capital gains from three years previously or one year after the date of investment; all capital gains are tax free; and you can qualify for BPR which we’ve been talking about after two years, EIS companies are a natural subset of BPR companies; and finally and perhaps most interestingly you get income tax loss relief. So if you do make a loss on any individual investment, and this is individual not aggregated, you can offset the loss against the income tax at your highest rate. Now that’s income tax, and I think that’s the only area in which you can offset a loss against income tax, and that is quite powerful. Worth saying that in order to qualify for these reliefs you do have to hold the EIS for three years minimum. PRESENTER: Okay. So let’s assume, keep it very simple, I put £1,000 into an EIS and just sake of round numbers and that ended up being £500, can I claw the whole £500 back via income tax? How does that work? ANDREW SHERLOCK: So if you invest £1,000 you would have got £300 back from your income tax. So you will have had £300 back plus as you say halved. So you would have got another £500 back. So you will have had £800 back of your £1,000, meaning that you had a loss of £200 - which you could offset against income tax at your highest rate, which if it was 45% would be a further £90, so your actual loss in that instance would be £110 on your £1,000. So it does help. And there’s quite an interesting graph, which we can see here, which limits the downside of your investment in terms of the tax relief. So here assuming that you’re a highest rate taxpayer the maximum amount that you can lose on an EIS is 38½% of the investment, and it skews the risk reward on the upside by all capital gains being tax free, and also you can keep your income tax relief. So there’s an asymmetric risk reward I think. Tax reliefs on VCTS – an overview PRESENTER: Okay and again, Odi, just the top-down view on VCTs, how generous are the tax reliefs then? ODI LAHAV: Still very generous. Probably not actually as generous as EISs, you still get your 30% upfront tax relief, and you get gains which are free of capital gains tax, and importantly, which is different from EIS, your income is also free of tax, so ongoing income, dividend streams are also free of tax. And so you end up, interestingly, with a divergence of products as to what they’re trying to accomplish, whether they’re trying to accomplish income for you or trying to really accelerate capital gains. The risk/reward characteristics of EIS and VCT PRESENTER: And taking that on board, I want to come back, we talked through the tax breaks, but just looking at them as pure investment vehicles, how high risk are they? So I mean let’s start with EIS, Andrew? ANDREW SHERLOCK: Well the EIS market I’d say is broadly split into two. There’s two main motivations for investing in EIS. One is pure investment, and there it’s a slightly higher risk, higher return investment, and the driver there is pure investment. Where, as we’ve seen earlier on, the tax reliefs help cushion the downside and enhance the upside. Typically, the returns are quite high but the risks are commensurably high. By investing in a portfolio you can mitigate those risks, but I think we’ll touch that in due course. The second area is tax planning investment, and investment is a key element of that too, but here it’s a lower risk/lower return offering where the idea is to try and preserve as much of the capital as possible and mitigate the risk. But still there is a real return typically of 3 or 4%, and that’s where we have renewables, media and various other areas of investment. And here the investment is key, must stand up on its own two feet, but the enhanced return is given by some clever tax planning which enables some of the reliefs to be unlocked. PRESENTER: And just stick on that point about building them up as a portfolio, I mean how many different EIS-type companies does it make sense to put together in a portfolio? ANDREW SHERLOCK: Well, from our own perspective at Oxford Capital, we invest on the growth side between six and ten growth companies, and we think that’s about the level of diversification in an EIS portfolio, and clearly there are other people who do slightly more or slightly less, and there is the possibility of spreading an investment across different providers. On the lower risk or lower return offering, we typically invest in between two and four companies. So there’s some element of diversification and again people may choose to invest across different providers. PRESENTER: And as a provider and this is in general terms do you have a specialism in one area, so I might get six or seven companies from you, but they might all be in the same area, so quite highly correlated? ANDREW SHERLOCK: We specialise on the growth side in growing companies that are post-revenue/pre-profit, across a variety of different themes encompassing communications, technology, healthcare and sustainability. So I think that we’re very conscious that there is some degree of diversification. And equally our infrastructure at EIS we split across different asset classes. So, at the moment, it’s anaerobic digestion, hydro and grid support, and there’d be a flavour of each of them in any investment. PRESENTER: Okay, so a bit of a mix. And VCTs, I mean essentially is a VCT an investment trust with a few more tax breaks, Odi? ODI LAHAV: It is and it isn’t, and the reason it isn’t is because of the way that people have viewed their investment in VCTs. I’m going to just broaden it if I may just a little bit, it includes EIS and BPR. I’ve come into this at Allenbridge from the point of view of we are investment advisers, we do investment research, and we are concerned with what does the underlying portfolio look like and whether that is a good investment; as I said before, not necessarily about the tax breaks. Tax breaks are important, and therefore the financial plan is to figure out whether that makes sense, but for us looking at this and comparing products, rating the different providers is all about whether the underlying investments are good investments and how the portfolio is being managed. I think, fundamentally, these should be viewed in that way, because there is no reason why you shouldn’t be able to make money in a portfolio of small company investments. The risks are high. I mean I do think that they are high risk companies and if you look at VCTs, as I said, there are ones that are more aimed at income and there are portfolios that are more aimed at capital growth, although because of the income benefit a lot of them have ended up being aimed a little bit more at income generating assets, and the way they’ve structured their products and the product offerings are very very different. I mean you asked about diversification as well, sorry, I’m answering Andrew’s questions now, but I’m on a roll. PRESENTER: It’s okay. ODI LAHAV: So I’m going to keep going. Some VCTs have got as little as four or five investments, others have got 100 investments. Now you’ve got those that are invested solely in venture capital, private companies, you’ve got those that are invested in a lot of AIM stocks as well, which really changes the profile from a risk perspective and also probably from your return expectations. And if I would, if I think one thing that this market really needs is it really needs financial advisers and the end investors in these products to think of these things as investments and judge them as investments, because in a lot of cases you’re not investing directly in a company, you are giving it to a fund manager. Whether it’s an investment trust style VCT or an EIS portfolio services company or a BPR portfolio service company, you’re giving it to somebody else to manage your money, effectively, and you need to be very very vigilant that they’re doing it properly. And if you are, then that will change the dynamics of how products are created, because as I said earlier asset managers will naturally try to create products that their investors want to buy. PRESENTER: So I think your key point is looking at it as an investment that has some tax breaks attached when you’re looking at VCTs. ODI LAHAV: I think you have to, I think that’s the only sensible thing to do. You absolutely need to think about your tax planning, but that’s for your financial advisers to do when you are thinking about which manager to choose, what portfolio service offering to choose, you need to think about it from an investment standpoint. ANDREW SHERLOCK: I couldn’t agree more, I mean it’s absolutely about the investment, but with different risk profiles and different returns. But the investment is key and needs to stand up on its own two feet; the taxes is a nice to have but is secondary. And I know we have an investment committee robust process and I know many others have similar processes that focus purely on the investment. Is this a good investment, is this a good risk-adjusted investment, you know, we need to really understand it. And absolutely I completely agree that it’s very much investment driven not tax driven. Analysing the track records of EIS and VCT PRESENTER: So when you look at your business, Andrew, at Oxford, what percentage would you say is adding value via the fund management and what percentage is adding value via the tax planning then? It’s probably a slightly unfair question; just get some sort of sense of what your offering is on… ANDREW SHERLOCK: Well I mean for example on the lower risk option, typically, and we are fairly typical, we’re targeting a return of around £1.15 per £1 invested after four years, which is simplistically about 3% a year. Clearly, if one was looking at the tax contribution to that, the tax contribution would be 30p, so your £1 you could either say you invest £1, but it’ll cost you 70p, which then turns into £1.15, or you invest £1 and you get 30p back plus your 15p targeted return, so you get £1.45 back. So is that one third, two thirds in that sort of scenario? On the growth side, you know, we and others target 2 to 2½ times people’s money, of which the capital gain is obviously tax free, and also there’s a degree of income tax relief, which again so on the growth side it’s very much more the investment and on the perhaps lower risk option I would say it’s probably more tax. PRESENTER: And, Odi, when you’re looking at all of these vehicles, I guess if it’s a VCT you’ve got a track record that you can follow. ODI LAHAV: Yes. PRESENTER: Is it as easy to work out how good an investment manager is in the EIS space, as it’s a series of companies and individual portfolios? ODI LAHAV: It hasn’t been. The market’s quite opaque and importantly VCTs being held to a slightly higher corporate governance regime, because they’re listed on the London Stock Exchange, they have, one very important thing that they do a little bit differently that they have to and that is the underlying valuations of the companies that they’re invested in have to be done properly, if you will, properly. In the EIS world, it’s a little bit more difficult. Until you have actually sold your company, you don’t really know what it’s worth and the fair values in between, you know, between the time where you’ve bought it and the time that you’ve sold it are, I should say, not by all managers, because some of them do have good corporate governance structures around and some committees, but in a lot of cases it’s very very difficult to get a good number for that and a good fair value. At the end of the day, it’s always about what you’ve got and when you’ve sold the company, but in reality they’re supposed to be marked properly. And once you’ve made an investment there is a potential conflict of interest between the investor and what the investor wants and the manager and what the manager wants. If you think about it, given all the loss reliefs and the capital gains tax reliefs and all of that that you get with EIS, if you’re an investor and the company’s done badly, you want to take the hit and you want to get your relief. If you’re the manager, you don’t want to take the hit, because for one you don’t want to show that you’ve made a mistake and two you want your assets to be bigger, because it just makes sense. So that has to be watched vigilantly. Now, historically, there’s been no source for valuations of underlying portfolios, and there’s a lot of intricacies and complexities which we can get into in one of the later shows, but we have quite recently created a new database system, which we call Allenbridge IQ. Which we are trying to solve this problem, we’re trying to create a little bit more transparency by collecting information at the underlying invested company level and trying to track the performance of the asset managers in terms of selection, valuation and then ultimate realisations, and over time we’ll be able to opine on that a little bit more with a little bit more audit trail behind us. PRESENTER: Okay, but it sounds like a fairly big exercise in number crunching that… ODI LAHAV: It is, and again the intricacies and complexities of how EISs are structured, because there isn’t a fund vehicle that is a collective investment vehicle that houses everything, it makes it quite difficult to do and to do in a fair way, fair to the managers, but also fair from the point of view of the investors. PRESENTER: Andrew? ANDREW SHERLOCK: Yes, I was going to say I mean I think from our own point of view and I speak for the industry generally we use international private equity valuation guidelines, which tend to be on the conservative side, and I think one of the key things that I know Allenbridge look at and I think is one of the key metrics is when people do exit investments, for better or for worse, to what extent is the valuation different from the last holding valuation. Because inevitably with some of these valuations they are often directors and managers’ valuations obviously with key mark-to-markets where possible, but if you’re valuing it at x and your exit is at 2x generally then you can draw some comfort the valuation process is perhaps conservative. If it’s ½x then I think you’re in a totally different ballgame. PRESENTER: And we talked a lot about the tax benefits and the investment opportunities there, but what about the fees? I mean how expensive is EIS and VCT for investors? ANDREW SHERLOCK: Well, if I can take the EIS question, I mean I think it is probably quite expensive, because it’s quite admin intensive. Typically, EIS on the growth side will sit on the boards of companies and take an active role in helping manage those companies, and typically an investment director might sit on three different boards or three or four different boards and they’re actively involved in driving the whole process forward, letting the manager manage, but helping steer them in the right way, and I think it’s quite difficult to find these things. So I think the fees probably are higher than a quoted market fund might be, and on the infrastructure it’s about finding the asset, securing the asset and then managing it. So be it in previously solar or subsequently anaerobic digestion or grid support or whatever it may be, there’s a lot of active involvement. It’s not about picking a share and investing in it. Fee levels on VCT and EIS PRESENTER: And the figures you were quoting earlier for performance, I think was it you were looking for 4% a year return on the growth portfolio, are those before or after fees? ANDREW SHERLOCK: All of the returns that I talked about were after fees. On the growth side, it’s 2 to 2½ times people’s money on a sort of broadly five year view is I’d say a sort of industry ballpark target, and on the lower risk lower return it’s anything from sort of £1.10 to £1.20 over a four year period, but that was where the 3 or 4% came. PRESENTER: Right, okay, and, Odi, how about VCTs? ODI LAHAV: Yes, well if I could just from an analyst perspective here, market as a whole for all of these tax shelter products, I think that they range from entirely reasonable to completely excessive and this is caveat emptor, you know, beware, you’ve got to look at the details of what you’re being charged. Because of the opacity, because of the lack of public information flow and because there are no collective vehicles, it is very very easy to have lots of different little charges here and there that end up adding up to something quite substantial. But that said I’m in agreement with Andrew that these are small companies that you’re investing in, in a lot of cases that the asset manager is not huge, so they don’t have huge economies of scale, and the opportunities, forget the tax benefits for a second, which are substantial, the opportunities are enormous when investing in small companies. But you do have to be very very aware and vigilant on the fees. With VCTs, from my experience, they’re probably on average a little bit lower than some of the EIS and BPR products, and that’s probably because of the transparency burden that the managers have being listed. PRESENTER: Okay, well we’re almost out of time. If you’re an adviser and you want to find out more about VCT, EIS, BPR, Andrew, where should you go and have a look? ANDREW SHERLOCK: Well, the EIS world, they have their own association, the EIS Association, which I would recommend as a general industry overview. There are different analysts, such as Allenbridge, who produce very good reports and industry reports, and there are a number of other different sources which might be helpful. I mean not least the individual provider’s website. I mean at Oxford Capital there’s plenty of generic stuff on the website too about EIS and how one might go about investing. So I think there are quite a few sources, you know, and that’s for an adviser, but if in doubt I think ask or pick up the phone, because there are a lot of people who are very keen to talk a bit more about EIS and talk through some of the benefits. PRESENTER: Okay, Odi, final thought from you? ODI LAHAV: Yes, we are a company of analysts that do a lot of research. So if you have particular questions, you have a need, we have lots of different options that we offer investors including subscription options to our reports for an adviser to help set up a panel of reasonable investments for their clients, but as Andrew said, you know, and this kind of holds true for all of the different investments, there is a lot of research out there on the web. There’s a lot of research about the tax benefits. Your advisers will probably know quite a lot about, if you’re investors that is, will know quite a lot about the potential tax planning avenues that you could construct while using these products as well. So there is a lot of research out there and I think the managers’ websites are actually a really great source of information to figure out how things work. ANDREW SHERLOCK: One final obvious place is the HMRC website, which is the obvious one, gives a sort of technical background and I think in conjunction with all the other things it’s probably quite helpful. PRESENTER: All right, we have to leave it there. Andrew Sherlock, Odi Lahav, thank you both very much.