What the new breed of EIS portfolios can do for you

  • You will learn how a portfolio service differs from a basic EIS fund
  • Gain an understanding of the tax reliefs inherent to EIS
  • Grasp the merits of diversification through a portfolio
What the new breed of EIS portfolios can do for you

Investors have become more attractive to tax-efficient investments such as Enterprise Investment Schemes but working out which one to invest in each year can be tricky for both clients and advisers.

When pensions were the mainstay of savings, there was only one decision to make - how much to contribute - and if you did not make up your mind till late March, there was still time to secure your tax relief.

For high earners, those days are gone, especially with the reduction in the lifetime allowance.

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As the scope for pension contributions has shrunk, its place has been taken by the Enterprise Investment Scheme (EIS), which offers significant tax relief.

The annual EIS limit of £1m is almost as much as you can build up in a pension in a whole lifetime. The catch is that leaving everything to the last minute does not work: not every potential investment is a long-term winner, while some EIS funds could leave your money lying fallow for months on end.

Fortunately a new breed of portfolio service has emerged, enabling investors to control how and when their money is invested.  

Basics of EIS

EIS is effectively a way of investing in shares of private companies. The companies have to be small – less than 250 employees – but they can range from start-ups to established profitable businesses. 

Investors get a powerful cocktail of tax reliefs to enhance returns and reduce risk. These include 30p initial cashback against income tax bills for every £1 invested, plus up to a further 31p if an investment fails.

Investors with high capital gains tax (CGT) bills can also get 20p cashback against CGT paid in the last three years or due in the next year.

There is also full exemption from inheritance tax once the shares have been held for two years, giving a further potential saving of 40p in the pound.

The annual limit is £1m for each investor and there is no lifetime limit, although shares will have to be held for three years to retain the tax reliefs.

Using a portfolio service

Speed of deployment is definitely a sensitive point when advisers are looking at different options for their clients in the EIS market. With the rise of the EIS portfolio model advisers now have the option to choose whether an EIS fund or portfolio would be suitable for their client base.

When a client invests in an EIS fund, the money is part of a pool of cash that gets spread across, say, 10 to 15 companies.

It usually takes 12-15 months to get the pool fully invested. Deployment delay can mean investors are waiting up to 18 months to receive their EIS 3 forms which are essential for investors when claiming tax reliefs.