Enterprise Investment Schemes  

Plunge in EIS offers creates capacity crunch

Plunge in EIS offers creates capacity crunch

A dramatic slide in the number of enterprise investment scheme offers in the first half of this tax year comes amid speculation that there will be a so-called “capacity crunch” with demand outweighing supply.

The latest figures from alternative investment research firm Intelligent Partnership, indicate that between April and October last year there were 60 per cent fewer EIS offers compared to the same period in 2015.

Investors can receive a 30 per cent tax break on income and do not face inheritance tax bills by investing in an enterprise investment scheme, which aims to help finance early-stage companies. 

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Back in November 2015, a number of changes were made to EIS, with managers no longer being able to rely on renewable energy projects and restrictions being imposed on the age of the invested companies.

Lisa Best, research manager at Intelligent Partnership, questioned whether managers were waiting until they were comfortable with the new rules before launching offers.

As well as a potential shortage of deals at the lower risk end of the EIS spectrum, Ms Best said the most popular, if also more risky, earlier stage deals might also be under pressure.

She pointed out that the changes led to the withdrawal of one of the biggest market players, Octopus Investments, from fundraising this year.

With current restrictions pushing up the risk profile of EIS, which the Financial Conduct Authority and Financial Ombudsman Service already considered as high, Ms Best suggested investors might put their money elsewhere, such as venture capital trusts.

The research manager said it was “no wonder” that many are predicting there will be less EIS money raised in 2016/17 than last year, which would be the first reversal since 2010/11. 

Yet she also pointed out that some of the drivers of demand into EIS have shifted, with the introduction of much lower tax ceilings for lifetime and annual pension contributions, which has created a need for alternative tax-efficient ways to invest.  

Awareness among advisers and investors is also picking up, with research showing a 16 per cent rise in the number of advisers recommending the EIS in 2016 compared to the previous year.

This comes after investment platform CoInvestor said many advisers are "ill-equipped" to cope with investors’ increasing demand for the EIS.

Other drivers continue to provide an important impetus to EIS investing, with rising asset prices meaning that many clients are facing capital gains tax liabilities.

“So, as some EIS managers warn investors to be ready to invest sooner rather than later to avoid missing out, others are quite satisfied with their own deal flows,” Ms Best said, adding this is currently a “difficult market to call”.  

However, while she said there was no doubt the rules changes are having an impact on EIS, she also pointed out that these types of schemes have been adapting to rules changes for more than twenty years.