Investments  

EIS law change puts AIM in focus

This article is part of
VCT and EIS Investing - January 2013

With traditional asset classes such as equity, bonds and property having delivered unexciting returns in recent years, advisers and their clients are, quite rightly, looking to alternatives to bring much needed growth and diversity to their portfolios.

And two profound legislative changes in 2012 are bringing the London Stock Exchange’s junior market – called the Alternative Investment Market (AIM) – squarely into their sights in 2013.

The purchase of newly issued shares of AIM quoted companies has long qualified for enterprise investment scheme (EIS) tax relief. But in 2012, the rules changed significantly in favour of private investors.

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Firstly, regulation introduced in April 2012 doubled the annual allowable

EIS investment per investor – from £500,000 to £1m – while at the same time increasing the amount of funds an EIS qualifying company could raise in a year from £2m to £5m.

The size limit of an EIS qualifying company’s balance sheet and employee numbers were also increased. A whole new class of larger, more mature businesses suddenly came within the scope of EIS investment – and a prime hunting ground for those is AIM.

The second key change was announced on publication of the 2013 Finance Bill. A general rule had previously been proposed to cap the amount of income tax relief that a taxpayer could receive (from the 2013/14 tax year onwards), which threatened to severely limit relief on losses on EIS investments. But the Finance Bill announced a carve-out for shares in EIS qualifying businesses.

The significance of these two developments is profound and independent advisers can no longer afford to ignore what this means for their clients.

But before discussing that further, it’s worth making two more important observations.

The first is about AIM itself. According to London Stock Exchange data, the average bid premium – the extra a bidder is prepared to pay over the market price before the bid is announced – in the 10 months between January and October 2012 (for companies trading in EIS qualifying sectors) was 47 per cent.

This compares, for example, to a historical range for main market equities of 10-20 per cent and clearly points to outstanding value opportunities on AIM.

The second important observation relates to how powerfully EIS reliefs can affect the performance of a portfolio.

This can be seen in the table (right) which shows what happens in three hypothetical portfolios containing just two shares each. In ‘scenario A’ both shares double in value; in ‘scenario B’ one share doubles and one loses 100 per cent of its value; and in ‘scenario C’ both shares lose all their value. In each case, an EIS fund dramatically outperforms a fund with no relief. All three scenarios are looked at in the context of both EIS qualifying and non-EIS qualifying investments. The difference in outcomes is striking.

The lowest row in the table shows the percentage returns on net investment – 100p in a non-EIS fund, and 70p (100p less 30p tax relief) in an EIS fund. In ‘scenario A’ (both shares double), the return on net investment is 186 per cent (because there is no CGT), compared with just 82 per cent in a non-EIS fund.