AdvizerTech
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Wealth Management

Enterprise Investment Scheme

 


What is the EIS?

The EIS was established by the UK Government in 1994 to encourage individuals to invest in smaller unquoted trading companies. Associated tax benefits were introduced for investing in these companies.

The most significant benefit is 30% income tax relief on investments up to £1M. In addition, investors can benefit from the performance of the underlying EIS companies.

So how does it work in practice?

Anna is a 45 year old executive with an income of £75,000. She requires tax-efficient savings and a broader range of investments.



 

Solution: £15K EIS Investment
Anna invests £15,000 into an EIS qualifying fund. She claims income tax relief of £4,500 (30% of £15,000), reducing her tax bill from £18,500 to £14,000.

What are the benefits of the EIS?

  • Income Tax Relief
    Reduction in income tax liability of 30% of the total investment up to £1M, providing the investment is held for at least 3 years. Income tax relief can also be carried back to the previous tax year.
  • Tax Free Growth
    There is no Capital Gains Tax (CGT) payable on gains realised on disposal on EIS investments if income tax relief is claimed. This would only apply if the investment is disposed of after being held for at least three years.
  • Inheritance Tax Relief
    Investments qualify for business relief so are exempt from inheritance tax after two years as long as you still own the shares on death.
  • Capital Gains Tax Deferral
    CGT on all or part of a chargeable gain can be deferred by investing the proceeds in qualifying EIS companies. Gains are deferred until a chargeable event such as the disposal of the EIS shares.
  • Share loss relief
    If EIS shares are disposed of at a loss, an investor can elect that the loss, net of income tax relief, can be offset against income in the year in which the shares are sold, instead of being set off against any capital gains.

Who is EIS suitable for?

Investments into EIS qualifying companies are most suitable for UK taxpayers to whom any of the following apply:

  • Income tax liability in the current or previous tax year
  • Capital gains to defer
  • Pensions are well funded with potentially limited scope for further investment
  • Would benefit from inheritance tax relief

Sounds almost too good to be true. Are there any potential drawbacks?

Investors should reflect on the reason for the EIS scheme being established almost 25 years ago, which was to encourage investment in smaller, unquoted trading companies.

Any qualifying company must have fewer than 250 employees and gross assets of less than £15M at the date of investment. Companies must also have a permanent UK establishment and must perform one or more qualifying trades.

Investing in such companies carries significantly more risk than investing in say FTSE 100 or 250 companies, so whilst there are significant tax breaks associated with EIS investment, this should be balanced against the risk of both under performing and failing companies.

This means that at least as much importance should be placed on the quality and potential of the underlying EIS companies as the tax benefits.

So how can Advizertech help?

Fundamentally, Advizertech help investors to manage risk and achieve positive investment returns as well as using technology to manage the administration of the investments through the EIS Lifecycle.

As can be seen from the Risk v Reward diagram, EIS investment ranks second in terms of risk and reward ranking alongside Direct Stockmarket Investment.

There are several ways of mitigating risk. Whilst investment can be made directly into EIS qualifying companies, we have access to specialist providers who invest in a basket of EIS companies, hence spreading risk across the portfolio.

Advizertech performs due diligence on each of these providers by analysing:

  • Financial strength
  • Companies House check, noting directors and reporting
  • Check Financial Conduct Authority or other regulator membership
  • Website check
  • GDPR compliance
  • Parent company checks as above, if applicable

We would look to further diversify by looking at the sectors in which EIS qualifying companies operate within the various provider portfolios.

Some examples of these sectors:

  • Energy Efficiency
  • Fast Broadband
  • Social Impact Growth
  • Healthcare Technology
  • Electric Vehicle Charging Stations
  • Special Situations Technology
  • High Technology Engineering

The outcome of our provider due diligence and sector diversification research allow us to build a provider panel of the highest quality whilst mitigating investment risk.

The panel of providers could have between 50 and 60 EIS qualifying companies within the total portfolio.

Provider Diversification

Does the high number of companies make managing the overall portfolio very complicated?

As can be seen from the EIS Investment Lifecycle, the process has a number of elements and an EIS3 is produced for each qualifying company. The EIS3 is needed to claim tax relief.

EIS Investment Lifecycle

An EIS is a government-issued certificate. Once an EIS3 certificate is received, an investor can claim relief. This timescale is indicative only; the time of receipt of EIS3 certificates will vary for each EID company depending on time required to allot shares, commence trading and for HMRC to process certificates.

It is fair to say that without technological intervention managing this process for large numbers of individual holdings would be extremely challenging.

This is the reason that Advizertech uses software that facilitates this process, providing you with a clear picture of the tax position of your holdings at any point in time.

In addition to managing the process of your EIS taxation benefits, our software allows you and your accountant access to your portfolio of EIS investments, giving you a complete overview of your investments.

The combination of taxation advantages, the expertise of the EIS providers, and the due diligence and software offered by Advizertech make investment in EIS companies a very attractive proposition for appropriate investors.

The tax treatment is dependent on individual circumstances and may be subject to change in future. In addition, the availability of tax reliefs depends on the companies invested in maintaining their qualifying status. Please refer to the HM Revenue & Customs website for further guidance on the tax relief available on EIS Investments.

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