Demand for Enterprise Investment Scheme (EIS) funds is growing all the time as more advisers and their clients consider tax efficient investments beyond pensions and Isas, as well as featuring in estate planning.
This is good news for investors, whose eyes are being opened in ever greater numbers to the high returns that EIS (and its start-ups focused sibling Seed EIS) can deliver, as well as their tax benefits. Good news, too, for the thousands of British businesses raising money through the schemes to fund expansion.
But it also means that more advisers who are unfamiliar with EIS are being asked about the scheme, must undertake research into the sector and make product recommendations for their clients. I am the first to admit this can be challenging for those unfamiliar with EIS, or who only have a passing knowledge of the scheme.
While there is a wealth of information, research, analysis and performance information freely available about, for example, Oeic funds, corresponding information about EIS funds and investments is harder to come by.
So how can advisers go about researching the market and making recommendations for their clients? First of all, common sense will get you a long way – so apply the same broad principles to EIS as you would to researching any investment.
In tax terms, you would want to identify your client’s tax liabilities, objectives arising from them and then the planning opportunities that are open to them. If inheritance tax mitigation is a goal, an EIS investment would be outside a client’s estate for IHT purposes after being held for two years and if still held on death. With an annual investment limit of £1m for EIS, clients with large estates and high levels of liquid assets could reduce their IHT liabilities substantially through EIS.
Risk must also be considered. EIS funds are fundamentally higher risk investments than the average Oeic fund – they are equity in unlisted (Aim excepted) UK smaller companies, so a good first step in this respect is ascertaining a client’s risk profile. Anyone investing in EIS should have a suitable risk appetite or categorisation, at least for the relevant portion of their assets that will go into EIS.
While model and risk-rated portfolios and approved lists exist for Oeic funds and cover the needs of most investors, regardless of their wealth, the same is not generally true of EIS funds. Most advisers and advisory firms do not use the products in such volumes as to have created buy lists or ready-made portfolios. Very often, advisers will have to do their own research when seeking to match an appropriate product or products to their client.
The EIS Association’s website is a good starting point. That lists open EIS funds, their websites and contact information, as well as more general information about EIS and SEIS.
I would recommend reviewing different providers’ websites for an overview of what they do and from this begin to identify EIS funds and investment managers that appear potentially suitable for your clients’ requirements.