ISA season is truly upon us now, but our users are thinking about much more than just how to make the most of their allowances. Tax-efficient investments, wills and how to pass pensions on optimally are also top of the agenda.
Enterprise Investment Scheme investments are a well-established and popular means of tax-efficient investing.
The Enterprise Investment Scheme was introduced by the government in 1994 to encourage investment into smaller UK companies by offering investors a range of tax benefits. Over the two decades of their existence, the tax incentives available through EIS investments have been made progressively more generous and they are now a popular method of tax-efficient investing for high net worth individuals.
EIS investors back smaller UK companies which have 250 or fewer employees and which must have no more than £15 million in assets (before an EIS investment is made). They cannot be listed on the main stockmarket, although they can be quoted on an exchange for smaller companies, such as AIM. There are also several strictures as to the kind of business the company can carry out too, such as the exclusion of financial/professional services and property development.
There are still many kinds of companies which are eligible for EIS funding and you will see EIS investment offered in sectors as diverse as film production, renewable energy and hospitality. You can invest directly in companies eligible for investment under the EIS rules, although most investors chose to invest through an EIS fund.
(Details correct at August 2014)
The tax reliefs available via EIS investments are certainly compelling and extend to income, capital gains and inheritance tax. This means EIS investments could prove a useful part of the wealth management strategy of investors at every stage of life. The rules on accessing these tax reliefs can be fairly complex, however, and you will need to take advice from a professional to ensure that you can access all the tax reliefs available to you. EIS investments are also likely to have a significant impact on the risk exposure of your portfolio as a whole and so need to be approached very much as part of an overall financial plan.
Backing smaller companies is inherently riskier than investing in blue-chip stocks, and the fact that EIS investments are not listed on the main stock exchange means that they are not as easily sellable either (the liquidity of any investment, meaning how easily you can access your money, should always be a key concern). These factors mean that it is very important only to make EIS investments once you have taken proper financial advice and are satisfied that these vehicles are the right option for you.
That said, it is important to have nuanced understanding of the risks and rewards of EIS investments. EIS investing does involve smaller, younger businesses but the 250 employee/£15 million asset threshold means that many thriving businesses with excellent prospects are still eligible. In fact, some of the biggest success stories of recent years have been AIM-listed companies. The fact that EIS-eligible companies are growing from a relatively small base means that they can deliver impressive growth for investors. Indeed, EIS investment often kicks off the next phase in a business’ expansion. It is not unusual to see EIS vehicles targeting annual returns in excess of 10%.
Although direct investment is possible, many EIS investors prefer to invest via EIS funds, for a number of reasons. Perhaps the most important is that EIS funds allow investors to invest in a portfolio of eligible businesses and so diversify the investment risk they are exposed to, by investing in companies at different stages or growth and perhaps in different sectors.
Another advantage to investing through an EIS fund is that a good EIS company will have a lot of experience in choosing companies with good prospects to invest in and helping to nurture them. The fact that EIS companies operate in esoteric industries like film or renewables makes sector-specific expertise very desirable in a fund manager.
There are innumerable EIS companies out there and it is vital to choose one with a good track record of delivering solid returns and minimising investment risk. But it can be difficult for non-professional investors to assess EIS providers due to the difficulty of comparing performance on a like-for-like basis.
Your wealth manager will be able to take you through all the risk and return considerations associated with EIS investing. They will also be able to identify reputable EIS fund companies should you decide to invest.
If you suspect you could be getting a better deal on price and performance from your existing wealth manager or IFA, get a second opinion. Simply complete our short online smart tool to start the process of upgrading to your best-matched wealth manager today.