Enterprise Investment Scheme investments are suitable for those who wish to diversify their investment portfolios in a tax-efficient way. Qualifying investments can benefit from up to 30% income tax relief on the investment amount, capital gains deferral and provide potential to realise any growth in the value of the investment free from capital gains tax.
In addition to the income and capital gains tax advantages, EIS investments can provide relief from inheritance tax once held for 2 years, providing they continue to be held on death. This is a useful means of planning to legitimately mitigate against inheritance tax for those who wish to retain ownership of and access to their assets during their lifetime or already maximise IHT exempt gifts. It is also valuable to investors who do not think that an inheritance tax mitigation plan with a 7-year timeframe is appropriate for them due to age or ill health or indeed have carried out IHT planning through trusts and wish to diversify their investment portfolios and tax planning arrangements.
There are three different ways in which an investor can invest in EIS qualifying holdings, they are:
- Individual (single company) EIS shares, whereby the investor purchase eligible shares in a single qualifying company.
- EIS Investment Funds which allow money pooled from a number of investors to be subscribed for EIS shares in a range of companies selected and managed by a fund manager. Many of these arrangements are structured as discretionary portfolios with all investors having the same portfolio of shares.
- An EIS Managed Portfolio is a discretionary portfolio which is invested wholly or mainly in EIS shares within an individual arrangement which is generally tailored to each individual investor’s requirements. The manager considers the suitability of the shares selected for the investor.
When selecting which approach is most appropriate, as well as the size of the intended investment, investors and their advisers should consider whether a single investment or spread of companies is most appropriate for them. Whether the investor has a sector or sectors which are of particular interest to them and whether they would like to have a passive or active (i.e. deploy their skills as a business angel) approach.
Often, those seeking to mitigate inheritance tax are likely to be comfortable investing in a pooled fund without any specific wish to be active in the business(es) in which they are investing. Commonly managers focus their fund on specific sectors, often in sectors from which they believe will produce relatively strong and predictable cash flows through contractual arrangements for funding to be received from reasonably reliable sources at some time in the future. Examples include the production and sale of films and TV programmes.
There were a total of 65 open EIS offers at the end of 2017, the terms of each is set by the investment manager. The average minimum subscription is in the region of £20,000, however, minimum subscriptions do vary. Although EIS investment portfolios have significant tax advantages, they are not low cost. Initial charges of an EIS investment fund are typically in the region of 5% of the value invested and annual management charges of 1.5 to 2.5%. Charges for a bespoke managed portfolio are higher and there may also be additional performance-related fees.
In exchange for the clear tax advantages, EIS investors accept a high degree of investment risk and potential illiquidity. Historically some EIS managers have put together lower-risk arrangements, often focused around capital preservation. However, over recent years, the government has worked to ensure that EIS investment remains targeted at “genuine risk capital investments”. With this in mind, the Finance Bill of 2018 introduces a new risk to capital condition which must be met for investments to be eligible for the tax reliefs. These conditions include that fact that the company in which the investment is made must have objectives to grow and develop in the long term and the investment must carry a significant risk that investor will lose more capital than they gain as a return (including any tax relief).
In conclusion, EIS has been a highly successful component of the UK venture capital market since launch in 1994. The recent budget highlights the government’s commitment to ensuring that EIS investment continues to support fledgling UK businesses who are seeking to grow quickly. In exchange for the potential risk taken by the investor, there are significant tax advantages. If you would like to find out more regarding EIS investment opportunities, please do not hesitate to get in contact with a member of the Albert Goodman Chartered Financial Planning team.