Enterprise Investment Schemes  

Brexit causes EIS uncertainty

Opportunities

Mr Peer identifies software as a good area for EIS investments as he expects no tariffs to be levied on cross-border software sales following Brexit. 

He proposes: “Software may, therefore, prove to be a robust and defensive sector during the Brexit process, when considering EIS investments.” 

Mr Munn adds: “On a more macro level, there has been some discussion around the fact that EIS was moulded around EU state-aid rules. Some have suggested that post-Brexit, the government could potentially increase the capacity of investee companies and the investment limits for investors.”

The EIS landscape has gone through a period of change in recent months. 

In the November 2017 Budget, chancellor Philip Hammond doubled the maximum investment in EIS funds from £1m to £2m, provided investors put money into “knowledge-intensive companies”, such as the life sciences sector. 

But Mr Hammond also removed the option to invest in lower-risk, asset-backed EIS offerings altogether on the grounds that these investments did not pose sufficient risk to justify the tax breaks. 

“A couple of interesting [EIS] examples are Cloudsense, which is backed by Salesforce – one of the world’s leading cloud-based software companies – and Open Bionics, which has already done work for the Marvel movies and is in partnership with Disney,” Mr Peer points out. 

Is EIS mainstream? 

So have these changes helped or deterred EIS from becoming a mainstream investment? 

Mr Peer says: “An EIS is categorised as a ‘non-mainstream pooled investment’ by the [Financial Conduct Authority] and therefore cannot be actively promoted to ‘retail clients’. However, given the changes to pension legislation over the years, they are becoming more mainstream due to reduced pension allowances for those with high incomes, such as above £150,000 a year.”

Malcolm Snook, senior financial planning manager at MPL Wealth Management, says: “EIS should be mainstream and it should be part and parcel of any conversation.

“But from an adviser’s perspective, it is not mainstream yet. This is because there are too many uncertainties and too many risks.”

Mr Snook adds: “With this marketplace, it is hard to get information to present to clients in a consistent format.”

Dan Rodwell, chief executive of GrowthInvest, says: “Education is important in terms of EIS becoming mainstream, as is clarity on what tax relief is designed to do. If transparency improves that will be the final step in terms of EIS moving towards a mainstream investment.”

Mr Hammond also announced more changes to EIS in the 2018 Budget, namely:

  • At least 80 per cent of funds need to be invested in knowledge-intensive companies.
  • The time period over which approved funds must make investments will be extended from one to two years.
  • Funds will be required to invest at least 50 per cent of each raise within the first 12 months, and to keep monies not yet invested in cash.
  • Introduction of a carry-back rule so that investors will be able to set their relief against income tax liabilities in the year before the fund closes.

Deployment 

How else can advisers ensure they are choosing the right managers to run their clients’ EIS investments? 

Some suggest “deployment of funds”, or how quickly a fund manager can use a client’s invested money, is critical to the success of any EIS investment.