Enterprise Investment Schemes  

Making the most of EIS relief

This article is part of
In and outs of liability mitigation

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.