Want to grow your portfolio in 2022? Discover the tax efficient benefits of the Enterprise Investment Scheme.
The Enterprise Investment Scheme (EIS) is a Government backed initiative which helps smaller yet higher-risk businesses (SMEs) to raise finance and have a platform for growth.
The Government offers significant tax reliefs to investors to support the flow of capital to these fledgling businesses.
The scheme was introduced in 1994 and is a well-established part of the UK investment and tax landscape.
Investing in an EIS can have a number of benefits notably if you have used up your allowances for pensions and individual savings accounts (ISA’s).
It can be useful for older investors if you have a large Inheritance Tax Liability, as the investments can be passed on Inheritance Tax free, if you have held them for two years and at time of death.
The key differences between Enterprise Investment Schemes and Venture Capital Trusts (VCTs) are the tax reliefs and investment approaches.
The 30% income tax relief is the same for both but the minimum hold period for EIS investments is 3 years (for a VCT its 5 years) to qualify for all their tax reliefs. A VCT would not qualify for carry back tax relief either.
Below are examples of EIS Funds that give an idea of the types of investments that BulbFin Advisers can help with:
Draper Esprit EIS. Encore Ventures LLP continues to raise a target amount of £30m to £40 million for Draper Esprit EIS Fund for the 2021/2022 tax year, to invest in EIS-qualifying companies across a range of sectors. The fund targets 8-12 investments over an investment period of 12-18 months. The Fund originally launched in October 2012.
MMC Ventures EIS. MMC Ventures Ltd raises funds for the MMC EIS Fund which launched in 2005 and has invested £211 million across 62 companies (June 2021) raising over £290 million since inception. The offer is open to both new and existing shareholders and is offered as an evergreen (multi-cohort) service.
Parkwalk Opportunities EIS. Parkwalk Advisors Limited is looking to raise approximately £80 million for Parkwalk Opportunities EIS Fund for the 2021/22 tax year. It seeks to identify and invest in EIS-qualifying companies that are well placed to commercialise or exploit technologies developed by research teams at UK universities. The Service launched in 2013.
|Fund Name||Strategy||EIS Risk Level||Offer Size||Min Subscription||Max Qualifying Subscription/Tax Year|
|Draper Esprit EIS||Technology,|
|MMC Ventures EIS||Specialist Technology||Medium||Evergreen||£25,000||£1,000,000|
|Parkwalk Opportunities EIS||Technology focussed||Medium|| Evergreen|| £25,000||£1,000,000|
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You can claim up to 30% on a maximum annual investment of £1m-worth of investments, or £2m-worth if at least £1 million of that is invested in knowledge-intensive companies, such as those in the life sciences sector.
The scheme has a carry back feature and you may be able to apply for tax relief on eligible investments to the preceding tax year, as long as the limit for relief is not exceeded for that year.
Other tax benefits include business relief, capital gains deferral, Inheritance tax relief and loss on relief on exit.
Tax rules can change and benefits depend on your circumstances.
EIS tax benefits are only available if the company maintains its EIS status.
Any investment carries a degree of risk.
The underlying assets within an EIS portfolio are higher risk as they are early stage unquoted companies.
Although you only need to hold EIS investments for three years to qualify for tax reliefs, you may not be able to exit at that point. EIS exits are generally achieved when their managers sell a company, for example via a trade sale and it could take eight years or more to realise an EIS investment.
The levels and bases of taxation and reliefs from taxation can change at any time and are dependent on individual circumstances.
You need to be comfortable with the risk levels and it is important to have a long-term investment horizon and not to invest money that you might need in the short term.
An investor may not get back the amount invested.
EIS investments are early stage, small to medium companies (SME’s) with a higher risk of failure than larger, listed companies.
EIS-qualifying companies vary significantly, across a wide range of sectors and industries.
The rules are fairly specific, but essentially to qualify a company needs to carry on a trade with a view to making a profit. Some companies and sectors are excluded, for example, those that deal in land, commodities or shares, have significant asset backing or contractual revenue streams.
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EIS returns will be mostly in the form of capital growth, rather than dividends.
Each offer will normally indicate a target return, which is a target only and not guaranteed. Target returns vary significantly from around 1.3x to over 10x money invested.
To qualify for EIS tax relief, you cannot be ‘connected’ to the investee company by significant financial interest or employment. These conditions must be true for the duration of a period starting two years prior to the share issue and lasting until three years after the investment is made.
You are recognised as being connected to the company if you are a paid company employee, partner or director. The exception is if you are an unpaid director of the company, in which case you may still claim Income Tax relief.
You are also connected to the company and therefore ineligible to receive Income Tax relief if you have a 30% or greater interest in the company or any subsidiary.
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