Why invest in EIS?
In 2014/15 more than £1.8 billion was invested
This year demand is set to rocket as tax rises and pension restrictions start
to bite for wealthy investors.
What is EIS?
The EIS – or Enterprise Investment Scheme – is designed to encourage investment in small growing businesses. An EIS refers to the investment in companies or funds that qualify and have valuable tax advantages as a result.
The main attraction for the government is the contribution small businesses make to the UK economy: they create jobs and generate tax. The main attraction for investors is the chance to invest in the newest and most exciting businesses with the added benefit of tax relief.
to 30% income tax relief, either against this year’s tax
bill, or last year’s via a carry back facility.
to defer capital gains made elsewhere, by investing these in
relief – if EIS investments don’t work out, it’s possible to offset
losses against income or capital gains tax
investment free from inheritance tax, if the EIS
is held for at least two years and you still hold it on your death.
The tax advantages are significant, but you should make your decision to invest based on the merits of the investment itself, not the tax benefits. Tax rules can change and tax benefits depend on individual circumstances. To retain the tax benefits of an EIS you need to hold it for at least three years and the investment must remain qualifying.
Investing in small businesses is inherently more risky than investing in large businesses. Small firms are more likely to fail and investments can be hard to sell. This is one of the reasons the government offers tax benefits on EIS. The reliefs can soften the blow if things don’t work out, but amplify any gains if the firm succeeds.
Whilst EIS are risky, some are asset-backed, which means there could still be some value for investors in these assets if things don’t work out. Examples might include pubs or self storage facilities which own a property or freehold.
Nobody likes losing money, but as you should have received 30% initial tax relief the value of the investment has to decrease by 30% before you will be out of pocket. You can also write off losses against either income or capital gains tax. This means in the worse case scenario, without any asset backing, the maximum effective loss for a 45% taxpayer could be as little as 38.5 pence for every £1 invested.
Who might consider an EIS
EIS are for wealthier and sophisticated investors who are not reliant on the amount they invest and can tie up their capital for the longer term. They must be able to accept the risk they could lose some or all of their investment.
Typical EIS investors might include those:
- with a large income tax bill
- who are affected by the reduced pension contribution and lifetime allowances
- who have sold a business, investment property or shares and want to defer paying tax on a capital gain
- who have received a tax free lump sum from a pension who want to reinvest the lump sum and get tax relief again.
Three EIS we like that invest this tax year
This review is not intended to be advice or a personal recommendation to buy the investment mentioned, nor is it a research recommendation. Wealth Club aims to highlight investments we believe have merit, but investors should form their own view on any proposed investment, and read the provider’s documents carefully.