Approaching growth assumptions for Tax Advantaged Investments (VCT/EIS/BR/AIM)

I'm interested to hear how people are approaching the selection of assumptions for when you model these in cashflow. I don't want them to have a huge impact on the model other than taxation. I think there is more than one 'right' answer here so just wanting to get a sense of what others are doing.

1) One valid approach would be to assume 0% real return either delivered as capital (EIS/BR/AIM) or as dividends (VCT) based on the desired outcomes from the taxation. This would drag returns slightly assuming your other portfolio/equity returns were greater than 0% real. However it would acknowledge that some of the underlying assets fail completely. That said these managers (as in venture capital first priority) are looking for a much higher overall return in many cases.

2) Another might be to assume that they will behave in line with your small cap/micro cap assumptions or using data from an AIM index. However they don't really match these sectors and are not as diversified as an index.

3) Another might be to take assumptions in line with your general equity growth assumptions and adjust the mix as per 1)

I'm sure that there are others. Do please share what you are doing.

Chartered Financial Planner FPFS APP Chartered MCSI
Head of Technical at Paradigm Norton

Twitter: https://twitter.com/danatkinsonuk
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Comments

  • We have a target return linked to client's agreed risk profile. We sue that rate of return irrespective of what the actual investment is.
    I would have thought that overall it makes very little difference to a financial plan forecast to finesse rates of return to this level.

  • Agree with Richard. If you have a client who has the investor profile to invest in this type of product then I'd expect the plan to succeed even with a 100% loss of the investment. And the exposure to this type of asset is going to be small enough that a +/- 2% increase in the growth assumption will be lost within the plan.

    Your option 3 with the last words deleted seems the most straightforward. Save this thread to add to your evidence of reasoned and reasonable 👍

    Benjamin Fabi FPFS
    Chartered Financial Planner
  • Most of the EIS providers have target returns expressed as per £1.00 invested e.g.£1.20 to £1.40 per £1.00 so I would use the mid-range of these for EIS, or the average if you are using several different EIS funds.

    BR providers use target returns as well so again I would use the mid point of what the provider is targeting or perhaps an average of what is available.

    VCTs and AIM are probably harder to work out, so probably use the index here or again an average of what is available.

    Also picking up on Benjamin's point about the crash testing, (and apologies if this is teaching granny to suck eggs), it is probably worth including a scenario where the tax relief fails as well just the investment, especially if you are using an EIS for CGT deferral as well as Income Tax relief.

    We have a couple of EIS's for clients where HMRC are challenging the EIS tax relief of the investee companies despite giving them advanced assurance.

  • Or exclude them completely as a starting point, as you could argue that capacity for loss should be 100% on these types of investment.
    Benjamin Fabi FPFS
    Chartered Financial Planner
  • Thanks all. It's really helpful to have this sharing of ideas. 100% what this community is about! :smile:

    Chartered Financial Planner FPFS APP Chartered MCSI
    Head of Technical at Paradigm Norton

    Twitter: https://twitter.com/danatkinsonuk
    Instagram: https://www.instagram.com/danatkinsonuk/
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