Making the most of EIS relief

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Making the most of EIS relief

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.

Do research

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.

Like any investment, there are degrees of risk within the EIS universe. An asset-backed EIS fund investing in trading businesses with physical assets, such as restaurants or gyms, for example, will typically be at the lower end of the risk spectrum. An EIS that specialises in investing in technology or new media companies could be at the higher end. A generalist EIS fund investing in a range of established businesses, across sectors, might sit at any point along the EIS risk spectrum. 

Each broad risk level will be accompanied by a broad return target or parameter. At the very lowest end of the risk spectrum and return spectrum, it is possible to find EIS investments that are effectively £1 in and £1 out – with the return being the tax relief that increases the investor’s 70p to £1 on the way in. Low to medium growth EIS funds might target something more like £1.20 to £1.50 back out, and high growth £2 or more.  

Ask questions

After identifying potentially suitable providers, the next step is to get in touch with them and ask some questions. 

EIS performance information is not readily available, so performance history and details of past investment exits are likely to be high on your agenda.

Some of the information you might want to know might include:

•    An aggregate performance figure, net of fees

•    Details of past individual exits, holding period and gains, or losses, generated from each one – so successes as well as failures, and in what proportion they have come

•    Average holding period

•    Fee structure

•    An outline of the investment process, philosophy and investment selection criteria

•    Are they a specialist? By sector, or geographic region – are start-ups or established businesses a focus?

•    Do they operate as a fund, in which the investment manager has total discretion over the investments made on behalf of investors, or more of a portfolio style approach, where the investor and/or adviser can choose from a list of potential investments?

It is an adviser’s job to know, or find out, whether a client has preferences in some of these respects – do they want their money back as soon as possible after the minimum three-year holding period or are they happy to wait longer? Some people might want to invest a particular sector in which they are interested or have experience, or to back local businesses, for example. It might even be that a single company EIS investment might be the right choice for a particular client. An adviser must do their research and select or recommend EIS products accordingly.

While independent information about EIS may be relatively scarce compared to other investments, it is available. There are specialist companies that provide research and data, which can be very useful for advisers when looking into EIS investments. The market is relatively small and some firms you might want to look up include: Micap, Intelligent Partnership, Tax Efficient Review, Allenbridge and Hardman & Co.

EIS diploma

At the risk of appearing to recommend my own organisation’s ‘cooking’, the EIS Diploma, created by EISA and developed with Tolley Exam Training, is something that advisers who write, or want to write, EIS business should consider.

It is the only dedicated EIS qualification and, for a total of 10 hours of online study and assessment, covers modules about all key areas of EIS, including aspects of product selection and their use in tax and financial planning. Holding the diploma will also satisfy compliance directors and departments that you are suitably qualified to advise clients on EIS. It also qualifies for CPD points. 

Tax

No discussion about EIS is complete without mentioning the scheme’s tax benefits. EIS is highly tax efficient and commonly used by advisers for the purposes of reducing an individual’s income tax liabilities.

This is understandable and perfectly acceptable. But as the investment benefits of EIS investments become better-known, the conversation and motivations for investing are changing. Where, before, EIS may have been used primarily because of the tax incentives, more and more those incentives are viewed by some investors and their advisers as an added benefit, a way of mitigating investment risk and enhancing returns.

This is no bad thing. EIS investments should arguably be considered in the context of portfolio diversification via an allocation to high growth potential UK micro companies. The tax reliefs simply act as an incentive to invest, recognising the risk investors are taking.

So, as interest in EIS investing grows, advisers are increasingly being called upon to develop their expertise in this area. Recognising some of the core differences between providers, understanding the questions to ask and knowing where to find research and data about EIS and SEIS, should help advisers deliver genuine added value to those clients who are suited to EIS and SEIS.

Mark Brownridge is the director general of the EIS Association and a chartered financial planner

Key points

Demand for EISes is growing, and they can be useful as part of estate planning.

Like any investment, there are degrees of risk.

EIS investments should arguably be considered in the context of portfolio diversification.