Investing in enterprise investment schemes (EIS) has become more popular, and the investor demographic is broadening to encompass a wider range of people.
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.
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.”
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.