Investment planning: EIS income tax relief — HMRC letter to investors and more

 Contents:

• Investment trust dividend payments dropped in the first half of 2021

• EIS income tax relief: HMRC letter to investors

Investment trust dividend payments dropped in the first half of 2021

(AF4, FA4, FA7, LP2, RO2)

New figures from Link Asset Services show investment trusts have not been immune from the dividend cuts seen since the pandemic

Source: Link Group

We regularly comment on Link Asset Services quarterly UK Dividend Monitor, but another Link publication on dividend performance caught our eye this week; its Investment Trust Dividend Snapshot. The main UK Dividend Monitor excludes investment trusts because to include them would result in double counting.

Link’s latest research casts an interesting spotlight on the investment trust (IT) sector which is often seen as offering more stable dividend income than other collective funds because of the ability of trusts to build up revenue reserves. The fresh data supports this theory: 

• In H1 2021, total IT dividends payouts were 3.1% lower than in 2020, the first fall since H2 2010. For the UK equity market, the corresponding figure from Link’s UK Dividend Monitor was an increase of 8.8% (29.4% including special dividends, which were unusually high). The higher UK numbers reflect a bounce back from a 40.8% total dividend drop between H1 2019 and H1 2020.

• Three in ten ITs cut their dividends in H1 2021, with the average reduction being 23%. The greatest impact came unsurprisingly from the UK Equity Income Sector, the largest income-paying sector in cash terms. Here, payouts were down 9%. The Global Sector also had a substantial impact, with an average cut of 10%, but despite the sector being over three times the size of UK Equity Income, total payouts are smaller as yields are much lower.

• Since the pandemic began, Link calculates that IT dividends have risen by 2% against a 34.6% fall for UK equities and 5.9% for global equities (dominated by the USA).

• Some of the difference is down to inevitable lag effects as ITs distribute their dividends once they receive payments from the companies in which they invest. You can see the effect in the last IT dividend drop in H2 2010, which relates to the 2007/09 global financial crisis.

• Another important factor in ITs’ dividend performance is those revenue reserves. Link calculates that pre-pandemic ITs had a combined revenue reserve of £2.13bn, but that by July 2021 that had reduced by £360m to £1.77bn. Viewed another way, Link says that £22 in every £100 of dividends distributed by ITs over the last 12 months has been funded from reserves. Not all ITs have raided their reserves – Link puts the proportion at 56%.

• One other way in which ITs have supported their dividend payments is by distributing capital gains as income, which many are able to do. However, for individual investors this can be a tax-inefficient route to preserving dividends.

• Looking ahead, Link expects ITs will post a dividend decline of 3.2% across 2021, again due to the lag effect.

These figures highlight the different timescales in which ITs operate and underline that the support to income distribution is at a capital cost.

EIS income tax relief: HMRC letter to investors

(AF4, FA7, LP2, RO2)

Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS) income tax relief may need to be partially or wholly withdrawn when an investment no longer qualifies. This typically happens when the company no longer meets one of the requirements. Investors may not know a special assessment needs to be made in these circumstances because the company hasn’t notified them or the investor may have been notified but is unaware of the tax implications.

HMRC says it will write to investors who have potentially been impacted by a ‘requirement failure’ which occurred during or before July 2019 to obtain the details it needs to make an assessment. At the same time, HMRC says it will highlight there may be capital gains tax consequences to ensure all the personal tax implications are dealt with.

The letter will be sent to the taxpayer in the middle of August with a copy to their agent when represented. The latest briefing and sample letters to a taxpayer and agent can be found here and here. Further batches of letters will be issued in the coming months.

HMRC also issued the first batch of letters during April 2021. Their previous briefing and sample letter can be found here and here. 

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