Why is there growing interest in EIS?

That is according to Mark Brownridge, director general of the EIS Association, which reports that since the Enterprise Investment Scheme was launched in 1993-94, more than 26,000 individual companies have received investment through the scheme, and over £15.9bn of funds have been raised.

It has grown so much in popularity, the Association recently published a guide to EIS, titled 'EIS: Under the bonnet', which it hopes will reach a wider audience who are not already familiar with this type of investment vehicle.

Tax takes

The tax reliefs available through EIS have always formed part of the attraction for advisers’ clients but there are a number of factors behind the recent renewed interest in EIS.

First of all, it is worth having a reminder of the tax boosts offered by EIS and Seed EIS.

Mary Tierney, tax director at Bennett Brooks, sets out: “Income tax relief is available on the amount invested at 30 per cent for EIS and 50 per cent for SEIS, as long as the investor pays an equivalent amount of income tax in the same tax year.

“The annual limits on investments are £2m for EIS and £100,000 for SEIS.

“EIS and SEIS investments can be carried back a tax year, so qualifying investments made before 5 April can be carried back to the previous tax year.”

Simon Ruthers, director of business development at Oxford Capital, identified three reasons for the growing interest in these schemes:

• Responding to reduced pensions tax reliefs.
• Enabling investors to manage capital gains.
• Countering increased inheritance tax (IHT).

He explains: “Investors are turning to EIS to protect themselves against reduced tax relief on pensions, soaring inheritance tax bills and to manage their capital gains after significant gains in property prices and stockmarket valuations.”

Pensions factor

Pension savers have seen HM Revenue & Customs reduce the annual allowance on pensions contributions from a generous £255,000 in the 2010/2011 tax year to £40,000 in 2017/2018, while Oxford Capital points out the highest earners are now restricted to tax relief on contributions of just £10,000.

Moreover, in successive Budgets, the lifetime allowance (LTA) has been reduced from £1.8m in 2010/2011 to £1m.

Mr Ruthers observes: “Many now see EIS as an excellent means of replacing the tax reliefs they used to enjoy on pension contributions, while investing in UK SMEs.”

He suggests with many high earners having been disproportionately affected by pension tax changes, they want to manage their tax liabilities and are beginning to recognise that EIS offers “a well-regulated, non-contentious and legitimate means to shelter their long-term retirement savings from high levels of taxation”.

Pension restrictions for higher earners are definitely a contributing factor to EISs’ growth, Mr Brownridge agrees.

“People want to invest tax-efficiently and, for higher earners who have maximised pension contributions, EIS is an extremely attractive home for their money, offering a wide range of tax benefits and the potential for high returns from investing in higher risk UK small companies,” he reasons.

EIS can be a helpful tool when it comes to IHT planning and capital gains tax (CGT) liabilities.

Mr Ruthers acknowledges CGT can be a barrier to people reviewing or reorganising their portfolios.  

“There are times when it is important to be able to access capital, to support family, plan retirement income, fund long-term care – or just to spend some money on the pleasures in life.  

“By investing the amount of the capital gain into EIS, investors can access their original capital, realise 30 per cent income tax relief and defer the payment of CGT, sometimes indefinitely.”

He adds: “EIS becomes effective as an IHT shelter after just two years, rather than the seven years needed for gifting solutions. That makes it an ideal solution for estate planning.”

British talent

But Mr Brownridge believes the story of EISs’ growth is about more than simply tax efficiency.

For many clients, the prospect of investing in some of the UK’s smallest and fastest growing businesses, which also create jobs for many people is a far bigger pull in their decision to put money into an EIS fund.

Mr Brownridge says: “The growth potential of these companies is incredible and investors are increasingly seeing that and wanting to gain exposure to it. 

Britain's got talent and a lot of its talent is being funded by EIS.Dr Ilian Iliev

“Of course, this is a relatively high-risk area and that is why the tax reliefs are there, to mitigate some of that risk.”

As Dr Ilian Iliev, managing director at EcoMachines Ventures, puts it: “Britain’s got talent, and a lot of its talent is being EIS funded.

“The enterprise investment scheme’s combination of upfront tax breaks and capital gains tax benefits mean that it is a powerful incentive for investors considering backing entrepreneurial and innovative companies.” 

He asserts: “A combination of factors has led to an increasingly developed ecosystem in the UK around EIS investment opportunities. 

“There is a renaissance in UK entrepreneurship, with EIS investment opportunities across a range of sectors including software, biotech, robotics, waste-to-energy, and even the creative industries. 

“The alternatives to investors, in a close-to-zero interest rate environment, and tightening around other areas of investment means that there has been an increasing supply of capital by private investors in this space.”

It certainly works both ways, with many small and medium-sized enterprises (SMEs) in the UK relying on the funding that comes their way from EIS.

In the know

Is the growing interest from higher earners forcing advisers to update their knowledge and make sure they know about EIS?

“Because the demand for EIS and SEIS has gone up and the educational requirements now for advisers have also increased, it’s a much more knowledgeable community out there now giving advice on what’s entailed in making an SEIS or an EIS investment,” reckons Bruce MacFarlane, managing partner at MMC Ventures.

“My assessment is yes, more and more individual IFAs within the firms that provide advice are getting qualified to give EIS advice.”

This is good news for clients, as seeking advice on EIS is essential. 

These types of tax efficient investments are particularly high risk and will almost certainly not be suitable for all investors, even those who might be higher earners. An adviser should know which of their clients can afford to take the increased risk or not.

Ms Tierney notes: "While both SEIS and EIS are very valuable tax reliefs and quite rightly encourage investment to help developing companies grow, they come with a huge amount of detailed legislation and (sometimes vague) HMRC guidance, and so while they are to be encouraged, both companies and individuals need to take detailed advice from advisers who have a good and deep knowledge of both schemes."

eleanor.duncan@ft.com