Enterprise Investment Schemes (EIS)
Looking to invest in an unlisted company, but you’re not sure of the risks? Enterprise Investment Schemes can provide you with this type of investment opportunity, as well as Capital Gains Tax relief, but there can be high risks. At Clear Solutions, our expert team is on hand to help you with this form of investment – we explore these schemes below:
Enterprise Investment Schemes
What are Enterprise Investment Schemes (EIS)?
Enterprise Investment Schemes are investment opportunities for individuals looking to invest in unlisted companies. They were launched by the Government in 1994 to help smaller higher-risk trading companies to raise finance, i.e. companies whose shares, stocks, debentures (a long-term security yielding a fixed rate of interest) or other securities are not available to be bought or sold publicly. In return for a range of impressive tax breaks, investors were, and still are, incentivised to make an investment.
How is an Enterprise Investment Scheme structured?
Investors buy shares directly in qualifying companies under Enterprise Investment Schemes. To qualify for Enterprise Investment Scheme status, the ‘investee’ companies must be unquoted and not listed on an exchange. Investors are free to either source attractive businesses for direct investment themselves or use a third-party investment intermediary. Such intermediaries have the expertise to source a selection of Enterprise Investment Scheme qualifying companies, often marketing Enterprise Investment Scheme as a ‘product’. Investors who want to invest in this product would deposit funds with the intermediary, who in turn purchases shares in these companies on the investors’ behalf.
The intermediary will issue an ‘information memorandum’, which explains the background to the Enterprise Investment Scheme opportunity, information on the companies involved, the rationale behind the investment ideas and the potential returns that may be achieved.
What are the tax benefits?
- Income Tax relief at 30%
Immediate relief is available on a maximum investment of £1,000,000. It is possible to use ‘carry back’, allowing all or part of the cost of the shares acquired in one tax year to be treated as though those shares had been acquired in the preceding tax year. Therefore, it is possible to create a tax reduction of up to £300,000 in any one given tax year.
- Business Property Relief (BPR)
Business Property Relief is available after two years of investment. This effectively means that the asset, if held until death, falls outside of the owner’s estate on death.
- Capital Gains Tax deferral
If you acquire Enterprise Investment Scheme shares then it is possible to defer gains in the previous 36 months until such a time as the Enterprise Investment Scheme shares are disposed of. This has always been a useful form of tax relief, but it is even more useful now as the top rate of Capital Gains Tax has reduced from 28% to 20%. Taxpayers can use this relief to swap a 28% tax rate for a 20% tax rate for gains that occurred in the last 3 years. This extra 8% will augment the 30% income tax relief that is also often available. Deferral allows the gains made on a disposal to remain deferred for the life of the investment.
- No Capital Gains Tax
If held for the full three years, there is no Capital Gains Tax on the sale of the shares.
- Loss relief
Loss relief can be used above and beyond the income tax relief granted.
NB: The Budget on 22 June 2010 announced that after that date it is no longer possible to defer gains under Enterprise Investment Schemes and at the same time for them to qualify for Entrepreneur’s Relief.
What are the risks?
There are two main risks relating to Enterprise Investment Schemes: Investment Risk and Liquidity Risk.
You can lose all or some of your invested money. By buying shares in small or start-up companies, an individual faces much greater risk than investing in more established and mature companies.
To mitigate this risk, an Enterprise Investment Scheme intermediary will try to:
- Spread investor’s money across a number of different companies.
- Invest in more mature or lower risk businesses or those that own real assets e.g. property.
- Carefully select companies following a rigorous process of due diligence.
There may not be a market to sell your Enterprise Investment Scheme shares. An investor must retain his Enterprise Investment Scheme shares for a minimum of 3 years to keep the 30% income tax relief given. The second-hand market for these shares may be limited, especially as the income tax relief is not given to the purchaser.
To mitigate liquidity risk, Enterprise Investment Scheme intermediaries will try to:
- Offer to buy back their own shares.
- Structure the Enterprise Investment Scheme as a planned exit or limited life offering.
What are the different approaches to Enterprise Investment Schemes?
- Single Company Enterprise Investment Schemes
An investment in a single company that has successfully been approved for Enterprise Investment Scheme status and is at the riskier end of the Enterprise Investment Scheme scale.
- Portfolio of Enterprise Investment Scheme Companies
A portfolio approach sees a manager or intermediary create a portfolio of companies approved by the Enterprise Investment Scheme.
- Approved Enterprise Investment Scheme funds
Approved Enterprise Investment Scheme funds have had their business strategy reviewed by HMRC. However, this is no guarantee that this type of Enterprise Investment Scheme is safer than other types of Enterprise Investment Schemes. This type of Enterprise Investment Scheme may have different timing consequences around the usual tax perks offered through Enterprise Investment Schemes.
Enterprise Investment Schemes are high risk
An Enterprise Investment Scheme investment is high risk and should rarely (if ever) form a large portion of your investment portfolio. Although the tax benefits of Enterprise Investment Schemes are attractive, the tax incentives alone should not be the sole reason to make such an investment. Enterprise Investment Schemes should be used to complement other more mainstream investments via open ended tax structures. Only consider this type of investment when your other tax allowances have been used up or if they form part of your overall financial planning strategy.
Did you know that Clear Solutions Wealth & Tax Management Ltd was shortlisted in 2015 and 2016 for the Growth Investor Award – Financial Adviser of the Year award? Recognising individual financial advisers who actively promote alternative investments, such as Venture Capital Trusts and Enterprise Investment Schemes, this award is judged on how companies like ourselves educate themselves, how we apply our expertise to add value for our clients, and what we do to maintain a consistently high level of advice on tax-efficient investments.
Please read the regulatory Health Warning below regarding investments. This is part of our good practice approach with all our current and potential clients, and reflects how seriously we take our duty of care and responsibilities at Clear Solutions.
INVESTOR HEALTH WARNING:
We strongly recommend that anyone attracted solely to this investment solution for tax relief should remember that it is an investment which means you can lose your money. We believe it makes sense to seek advice from a suitably qualified investment professional with appropriate professional indemnity in place and proven expertise in this field.
Trust us… we’re experts
Our Advisers hold Chartered and Certified qualifications, ranking amongst the highest in the profession. Our highly qualified team of experts are above the FCA minimum standard for advisers. In 2008, we were the first joint practice to be awarded the new British Standards ISO 22222 International Financial Planning Standard by the Chartered Insurance Institute. Our Managing Director was asked to be an assessor of the new standard helping to disseminate ‘best practice’. This measures the ability to deliver a consistent holistic financial planning service to an extremely high technical standard. In 2013, we became the only firm to be awarded the BS85777 accreditation by the Chartered Insurance Institute.