Q: I would like to know more about the Enterprise Investment Scheme and investment in EIS qualifying companies.
A: The Enterprise Investment Scheme (“EIS”) was set up in 1993/4 and since then over £10bn has been invested into more than 20,000 companies. In the most recent tax year for which HMRC statistics are available (2011/12), over £1bn was raised under EIS.
EIS provides tax breaks for qualifying investors and was designed to stimulate investment into UK based SME’s. The main reliefs available to private investors are an income tax relief on the cost of the investment (currently 30%) and an absolute capital gains tax exemption if the investment is sold at a profit in the future.
All individuals investing under EIS, particularly those new to EIS investment, should seek a portfolio of EIS investments to mitigate risks. This EIS portfolio should also form a minor element of an overall investment portfolio of at least 10.
EIS investment has become more mainstream over the past 18 months or so and new providers have entered the market. EIS (and latterly Seed EIS) can be applicable for start-up companies through to larger, established and profitable companies who may have been trading for many years. Therefore EIS is capable of being deployed on a broad range of investment scenarios.
Most recently the Government has introduced the Seed Enterprise Investment Scheme (“SEIS”) for investment into start-up companies. SEIS is similar to EIS with the major difference being that an investor may claim income tax relief at 50% on his investment.
There are a few ways of investing via EIS with the two main choices being:
1. Investing directly into a company either on your own or via part of a syndicate on a deal by deal basis, as and when opportunities arise. This helps an investor maintain control of the exact quantum and the company into which her/his investment goes.
2. Investing indirectly via a managed portfolio service or EIS Fund. This option loses some of the control in choosing into which companies an investor’s funds are invested but may open up more investment opportunities or an improved quality of deal flow from the service provider or Fund Manager. In this instance, it is advisable to seek a provider with a track record of EIS investing including successful exits.
When investing directly, look for quality of management, IP Protection, demonstrable competitive advantage, clear route to market and knowledge of market amongst other criteria which may be more desirable to each individual investor.
Individuals are able to invest up to £1m per fiscal year under EIS and a further £150,000 under SEIS but investment into EIS and SEIS companies is high risk and individuals should be fully aware of the risks associated with EIS investing as well as the potential rewards.
This answer was given by Simon Thorn, Corporate Finance Advisor at Acceleris Capital. You can contact Simon on 0161 850 0190 or email firstname.lastname@example.org
August 12th, 2014