How to… use the Enterprise Investment Scheme

Three experts discuss the opportunities and risks associated with this tax-efficient initiative

How can advisers make the most of the opportunities offered by the Enterprise Investment Scheme?

Deepbridge Capital partner Andrew Aldridge, Hambro Perks investment manager Nicholas Sharp and Enterprise Investment Scheme Association director general Mark Brownridge talk tax breaks and early-stage companies.

What types of investors should be using the EIS?

Aldridge: Firstly, EIS investments are in unquoted stocks, therefore illiquid and should be considered as high-risk. Investors who could be using EIS propositions include those with a specific tax need but also who have an appetite for growth-focused stocks. Due to the risk to capital condition which is now attributed to EIS investments, it is increasingly important that investors understand the types of underlying companies into which they are likely to be invested.

Brownridge: There is a perception that EIS is the preserve of high-net-worth individuals, but this should not be the case. Anyone with either – or ideally both – an appetite for growth-orientated investments or saving a tax liability (income, capital gains or inheritance tax) would be a good fit for EIS.

It can be perceived as a higher-risk investment due to the fact that you are investing in small, early-stage businesses where the risk of failure is well known to be higher than later-stage businesses. Investors need to be aware that their capital is at risk, but if you are comfortable seeking high returns for high growth, then EIS can be an attractive option.

What are the benefits of the EIS?

Brownridge: EIS offers a wide range of generous tax efficiencies, from income tax relief through to IHT exemptions. Income tax relief means that investors will receive 30 per cent of their investment (up to £1m) back from their tax bill.

The scheme also allows for CGT deferral that can be extended for long periods of time by reinvesting into EIS at exit.

EIS also allows investors to support British small businesses, which can be fantastically exciting, with huge growth potential and scope for high returns.

How fast can it be to invest?

Sharp: Most EIS funds will aim to deploy their money over the course of a year. EIS reliefs can be claimed at the point each individual investment is made into a company.

Deal flow and pipeline is an essential point of differentiation between funds. It is crucial to determine whether the manager has the opportunities to put investors’ capital into great businesses with a strong chance of generating large gains at the point of realisation.

Remember as well that EIS investments must be owned for three years to enjoy all the tax reliefs.

Aldridge: Some providers in the market state that it may take up to 18-24 months to fully deploy investors’ funds.

They are usually those providers that are adjusting to the new world of EIS and who historically were not targeting growth-focused companies.

However, those managers who have always been experts in innovative growth-focused sectors, such as disruptive technology and life sciences, should be able to fully deploy in just a matter of weeks.

How can you access EIS funds (either directly or through platforms)?

Aldridge: Financial advice is important. Advisers can liaise with providers either directly or through a number of tax-efficient specialist platforms, such as Kuber, Growth Invest and CoInvestor.

Sharp: Most money invested into funds is likely to be as a result of IFAs and wealth managers advising their clients on specific ones managed by trusted providers with a history of strong returns. It is possible to invest in both individual companies and funds directly or via platforms.

Some platforms will offer individual company investment opportunities. Our view is that it usually makes more sense to invest via a fund, unless an individual has venture capital expertise.

Some platforms will offer cut-price investment into funds in order to help those funds raise large amounts of capital. It is important to understand that some fund managers look to raise large pools of capital (they get paid for managing the large assets under management), while others look to raise less money but aim to get paid via performance fees charged on large capital gains generated for their clients. The former may raise so much money that they struggle to deploy it into appropriate opportunities, thus depressing returns.

Brownridge: EIS is not typically available from mass-market investment platforms, but can be accessed through specialist platforms and services. The majority of EIS investments are accessed through funds or private investment houses, often specialising in alternative finance for small- and medium-sized enterprises. Some of these provide analysis into the sector, something that can also be obtained from specialist providers.

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Comments

There are 4 comments at the moment, we would love to hear your opinion too.

  1. At a recent seminar on tax efficient investments and accountant actually admitted that he didn’t have any clients who invested in these making a profit. A case of the tax tail wagging the investment dog? My definition of the acronym seems apposite: Every Investment Sinks.

  2. Christopher Petrie 9th May 2019 at 8:21 am

    I’m afraid you’re showing your age Harry.

    Look at the performance of EIS schemes such as Downing. Excellent results on top of the high tax breaks.
    30% income tax relief and 40% IHT relief after 2 years is attractive to many High Net Worth clients even if the returns themselves just broke even (many have done much better).

    For the right clients, EIS have a place.

    We’re not in the 1990’s now and things have moved on a bit since your day Mr K!!

    • Philip Castle 9th May 2019 at 8:54 am

      Hi Harry & Chris. Sorry Harry me old mate, I agree with Chris. There is a place for EIS, especially if the client has a CGT liability as well as income tax and IHT issues to address. You kill 3 birds with one stone and simply reduce the UK smaller company exposure in the rest of their portfolio to keep the overall volatility of a portfolio down.
      It’s the difference between looking at a product /fund in isolation and putting a lable on it describing it’s risk level and looking at a client’s portfolio across the board.
      We make it very clear that invariably anything EIS is likely to be the highest risk bit of their portfolio (we’ve not done any SEIS), usually followed by an AIM based VCT, but if the EIS/VCT is just £5k of a £500k portfolio (and often the EIS/VCT may have 5 to 100 different holdings), the concentration risk can be less than some advisers who’ve used one provider/fund and is 100% UK FTSE100 which holds 2 or even 3% in one company!

  3. Christopher Petrie 9th May 2019 at 8:24 am

    And of course, Loss Relief on top of the other tax breaks can mean some clients are almost unable to lose money even if the investments bomb! (Which good EISs don’t tend to anyway)

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