What advisers need to know about Enterprise Investment Schemes

On a per-company basis, a client can invest in an EIS company with high growth potential and pay no capital gains tax on growth. 

The client can also make use of loss relief (against income or capital gains tax), on the difference between the amount invested net of income tax relief, and their proceeds on sale should their high-risk investment not pan out. 

On a portfolio basis this is very valuable, as each company is considered separately, so loss-making EIS investments within portfolios that make money overall are not precluded from this relief. 

Additionally, investors can:

• claim upfront income tax relief on up to 30 per cent of the investment amount, either in the year a company is invested in or the prior tax year;
• defer a capital gain;
• benefit from relief from inheritance tax, provided the investment is held for at least two years and at death.

How can clients invest in EIS?

Investing in early-stage, EIS-qualifying companies is unpredictable and suited to experienced investors who are comfortable with high risk.

Investors can invest in an individual EIS-qualifying company of their choice. 

They would have to do their own research, which takes time and knowledge. And it is also unlikely they would have access to the same kinds of opportunities as an investment manager.

Naturally, many clients choose to invest with a specialist manager. These services invest funds on behalf of multiple investors in a portfolio of qualifying companies. 

Having a specialist manager means ongoing oversight of the companies in the portfolio, the potential to influence board-level decisions and the expertise needed to successfully sell portfolio companies.

Investment through specialist EIS managers can be structured as an unapproved EIS portfolio or an approved knowledge intensive EIS fund.

The main difference between these is the timing of when an investor can claim tax relief. This becomes particularly important towards tax year-end. Read on for a short case study explaining this.

While tax regulations refer to EIS investments as funds, they should not be confused with other collective investments. An investor in an EIS fund will own shares in the underlying companies, rather than owning shares or units in any fund.

What are the risks?

Investing in early-stage, EIS-qualifying companies is unpredictable and suited to experienced investors who are comfortable with high risk.

EIS investments could fall in value, potentially to zero, and investors may not get back their investment.

Investments in smaller companies can be volatile, meaning the shares could fall or rise in value more than shares of larger, established companies.

EIS shares are unquoted, and they may be harder to sell than shares listed on the main market of the London Stock Exchange. 

There are also tax risks to consider.