OpinionApr 4 2018

An imaginative EIS industry will succeed under new regulation

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An imaginative EIS industry will succeed under new regulation
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Chancellor Philip Hammond announced in his Autumn budget that the Enterprise Investment Scheme (EIS) would see significant changes for the coming year.

The aim is to bring it back in line with the original spirit of the law, which is providing capital to genuine growth businesses. 

The Finance Bill, given royal assent on 15 March, will see a large number of lower risk investments no longer qualify for EIS.

The rule changes are aimed at eliminating capital preservation or guaranteed schemes, ie asset backed investments.

One example would be a green energy scheme which is able to pre-sell output at a set price to the National Grid.

While there are still risks attached to such investments - for example, a tariff increase from government intervention - they are deemed generally to be a lower risk level than investing in new growth companies. 

The industry is very imaginative, and with so many people analysing the new rules, EIS investments are sure to survive, albeit in a different format.

Clients wanting to invest in EIS this year may see reduced capacity as the capital schemes wind down.

Across the industry we understand there has been a rush as investors look to invest in capital protection schemes before the new rules lock in.

This could lead to a re-evaluation of Alternative Investment Market (AIM) quoted EIS-qualifying investments.

The industry is very imaginative, and with so many people analysing the new rules, EIS investments are sure to survive, albeit in a different format.

Historically, the industry has adapted well, and because our offering is all ‘risk capital’, we have not had difficulty in adapting to the new regulations or in finding exciting opportunities for EIS investment. 

In theory, these changes make EIS overall a riskier asset class. However, it can be an important part of an overall client offering for the right client - assessing suitability is key. 

It is worth re-iterating the 30 per cent upfront tax breaks associated with EIS are part of the de-risking process.

In addition, the clients have the ability to 'carry back' tax relief, so the investment can be treated as though it were made in the previous tax year.

The cost of investment can also be lowered by rolling other capital gains into the EIS, and by utilising losses over and above the upfront tax relief.

Shares also qualify for Business Relief (BR) after two years, effectively making them exempt from inheritance tax.

Another important aspect to de-risking is the high level of due diligence applied.

As a firm, we spend a lot of time with companies and financial analysts to ensure that the businesses that we invest in are viable and capable of delivering capital growth and shareholder value. Rigorous financial analysis is applied in all instances.

An absolute pre-requisite is that the company has applied for and received the full and appropriate pre-authorisation from HM Revenue & Customs.

EIS remains an attractive proposition for those seeking capital growth with income tax relief who are prepared to accept the risks and opportunities of investing in small, emerging growth companies.

Paul Sheehan is an investment manager at WHIreland