EIS loss relief & personal experience of VCT, EIS and development loans
Posted: December 19th, 2021, 11:26 am
Hi everyone,
Back in 16/17/18 I trialled some higher risk investments. Over this period I invested in 3 EIS (one was SEIS); 3 VCTs and 3 development finance loans to see if I wanted to add any of these investments to my portfolio longer term. My question relates to EIS loss relief - one SEIS and one EIS investment are effectively on life support and I am confident they will be worthless. Do I have to wait for the company to fold to claim loss relief? - Is it possible to write them off or gift them to charity for naught etc. and claim the loss relief this year?
Many thanks
W
In return - here's my personal experience, thoughts and % returns from the investment portfolio. First some top level info - the VCT, EIS, loan portfolio was weighted 66.6%; 22.2% 11.1% before-tax relief due to my perception of the risks of each sector and I accept that a sample size of 3 in each investment class may not be enough for me to draw meaningful conclusions but it is all I have so here it is:
Development loans; -20% on capital total return over 5 years. 1 performed; 2 defaulted and receivers were required to take over the assets and sell them down. The last money is scheduled to be returned in Jan 22. The under-performance vs. my core portfolio (60% global equity indices and the 40% in a small number of investment trusts / REITS) is eye watering. While the high fixed returns which are 'asset backed' seem attractive my main concern regarding these investments was that when they go wrong; they go really wrong - sadly this proved correct.
A 9, 18 month and two year loan turned into a 3 year loan for the one which performed and 5 year loans for the two which defaulted. The legal, receiver and other associated costs spiralled on the defaulted loans and then the cherry on top has been the realisation of the asset far below pre-loan independent valuation... que further law suits (and costs) now against the valuation firm. I feel somewhat foolish for not sticking with my gut, but the sum invested was relatively small - the frustration I have had over recent years after realised this is something I wanted nothing to do with has been the length of time to exit. We have had covid but the main delays have all been legal - I wrote the investments to zero and told the firm to stop contacting me outside of repayments and am very much looking forward to the final 15% capital repayment in Jan. I realistically could have fared a lot worse without the one performing loan which repaid with over a year of extremely high penalty interest ... I would avoid this asset class like the plague.
2 EIS & SEIS; the 30% and 50% tax relief respectively was invested in my primary portfolio of global equities which has done very well. The investments themselves were very high, high and medium/high risk. The very high SEIS was a fund of 10 investments in media and games - will be worth zero so I will lose 27.5% of investment after tax reliefs. The medium / high risk EIS was effectively all implementation risk - build a factory to produce something they had an offtake agreement for ... turns out Covid + staff shortages since Brexit and now the energy spike means they were never able to get near their revenue forecasts - they will likely soon go into receivership -38.5% return after reliefs. Lastly, my final company is show a 250% positive return if realised but paper profits are worth paper. My frustrations come from - exit plans appear to be a moving goal post - the performing company is now talking about a trade sale in 2027. I won't be doing any more EIS / SEIS because I simple don't enjoy the lack of control, high fees and my perception is the need for a venture capital style portfolio where one investment may pay for another 9 losers - too much work and effort for me as I haven't overly enjoyed the process.
VCTs - two have been really successful; one has been poor. Overall the investments are +45% total return including tax relief return and this does not account for the reclaimed tax been invested into my primary portfolio for the past 4-5 years and the tax free aspect of the dividends which is a really significant bonus for higher and additional rate tax payers. I invested in 3 major VCT providers and from next April I can start selling my holdings. Do I plan to continue holding and investing in VCTs - undecided but leaning towards no and selling my holdings. I personally feel these funds are a bit opaque and the fees are high. In addition there is a huge amount of cash pouring into VCTs since the change of pension relief in the middle of the last decade. I wonder if the past few years has been a great environment for venture capital with low interest rates and a huge amount of money flowing into the private equity and venture capital markets. Lastly, the rule changes (I believe in 2016) reducing some less risky qualifying investments in VCTs (like MBOs) has the effect of increasing VCTs risk over time - as the pre-2016 portfolio investments were realised and replaced with the new riskier qualifying investments. So for these reasons and the simplifying reason I mention below I lean towards closing the door on these investments.
Last comment - a few years ago I started the process of really simplifying my financial life - highly liquid and diversified equity portfolio with a couple of investment properties etc. The simpler I keep things seems to really boost my happiness and feeling towards my finances which is also something to be valued so my gut is all the above investments will be unwound orderly as soon as it makes sense.
*apologies for any English errors, this turned into a much longer note than I intended given my original question
Back in 16/17/18 I trialled some higher risk investments. Over this period I invested in 3 EIS (one was SEIS); 3 VCTs and 3 development finance loans to see if I wanted to add any of these investments to my portfolio longer term. My question relates to EIS loss relief - one SEIS and one EIS investment are effectively on life support and I am confident they will be worthless. Do I have to wait for the company to fold to claim loss relief? - Is it possible to write them off or gift them to charity for naught etc. and claim the loss relief this year?
Many thanks
W
In return - here's my personal experience, thoughts and % returns from the investment portfolio. First some top level info - the VCT, EIS, loan portfolio was weighted 66.6%; 22.2% 11.1% before-tax relief due to my perception of the risks of each sector and I accept that a sample size of 3 in each investment class may not be enough for me to draw meaningful conclusions but it is all I have so here it is:
Development loans; -20% on capital total return over 5 years. 1 performed; 2 defaulted and receivers were required to take over the assets and sell them down. The last money is scheduled to be returned in Jan 22. The under-performance vs. my core portfolio (60% global equity indices and the 40% in a small number of investment trusts / REITS) is eye watering. While the high fixed returns which are 'asset backed' seem attractive my main concern regarding these investments was that when they go wrong; they go really wrong - sadly this proved correct.
A 9, 18 month and two year loan turned into a 3 year loan for the one which performed and 5 year loans for the two which defaulted. The legal, receiver and other associated costs spiralled on the defaulted loans and then the cherry on top has been the realisation of the asset far below pre-loan independent valuation... que further law suits (and costs) now against the valuation firm. I feel somewhat foolish for not sticking with my gut, but the sum invested was relatively small - the frustration I have had over recent years after realised this is something I wanted nothing to do with has been the length of time to exit. We have had covid but the main delays have all been legal - I wrote the investments to zero and told the firm to stop contacting me outside of repayments and am very much looking forward to the final 15% capital repayment in Jan. I realistically could have fared a lot worse without the one performing loan which repaid with over a year of extremely high penalty interest ... I would avoid this asset class like the plague.
2 EIS & SEIS; the 30% and 50% tax relief respectively was invested in my primary portfolio of global equities which has done very well. The investments themselves were very high, high and medium/high risk. The very high SEIS was a fund of 10 investments in media and games - will be worth zero so I will lose 27.5% of investment after tax reliefs. The medium / high risk EIS was effectively all implementation risk - build a factory to produce something they had an offtake agreement for ... turns out Covid + staff shortages since Brexit and now the energy spike means they were never able to get near their revenue forecasts - they will likely soon go into receivership -38.5% return after reliefs. Lastly, my final company is show a 250% positive return if realised but paper profits are worth paper. My frustrations come from - exit plans appear to be a moving goal post - the performing company is now talking about a trade sale in 2027. I won't be doing any more EIS / SEIS because I simple don't enjoy the lack of control, high fees and my perception is the need for a venture capital style portfolio where one investment may pay for another 9 losers - too much work and effort for me as I haven't overly enjoyed the process.
VCTs - two have been really successful; one has been poor. Overall the investments are +45% total return including tax relief return and this does not account for the reclaimed tax been invested into my primary portfolio for the past 4-5 years and the tax free aspect of the dividends which is a really significant bonus for higher and additional rate tax payers. I invested in 3 major VCT providers and from next April I can start selling my holdings. Do I plan to continue holding and investing in VCTs - undecided but leaning towards no and selling my holdings. I personally feel these funds are a bit opaque and the fees are high. In addition there is a huge amount of cash pouring into VCTs since the change of pension relief in the middle of the last decade. I wonder if the past few years has been a great environment for venture capital with low interest rates and a huge amount of money flowing into the private equity and venture capital markets. Lastly, the rule changes (I believe in 2016) reducing some less risky qualifying investments in VCTs (like MBOs) has the effect of increasing VCTs risk over time - as the pre-2016 portfolio investments were realised and replaced with the new riskier qualifying investments. So for these reasons and the simplifying reason I mention below I lean towards closing the door on these investments.
Last comment - a few years ago I started the process of really simplifying my financial life - highly liquid and diversified equity portfolio with a couple of investment properties etc. The simpler I keep things seems to really boost my happiness and feeling towards my finances which is also something to be valued so my gut is all the above investments will be unwound orderly as soon as it makes sense.
*apologies for any English errors, this turned into a much longer note than I intended given my original question