Read our eight reasons why EIS investing is becoming more mainstream and growing in popularity with advisers and clients looking for tax-efficient investments.
Most people are aware of the benefits of pensions and ISAs, but there is a wide range of alternative investments that may also help investors who wish to invest tax efficiently. The government-backed Enterprise Investment Scheme (EIS) is one of them.
EIS is a highly sought-after way for small UK companies to attract growth capital investment, having raised nearly £1.8bn in the 2016/17 tax year, according to government figures.
Not only does EIS help companies grow and become more profitable, it provides investors with the opportunity to capitalise on that success. Indeed, with a surge in investment, interest and press coverage, in recent years EIS has become increasingly popular with advisers and investors – and here are eight reasons why.
EIS investment’s triple appeal
EIS investment holds the triple appeal of supporting the economy, and offering government-backed investments and attractive tax benefits that are usually uncorrelated to mainstream capital markets. They are particularly inviting for people looking to reduce their income tax bills.
And, given the relatively recent caps on annual pension contributions, the scheme can help investors who want to save tax-efficiently for their retirement but can no longer make use of their pension contribution allowance or lifetime pensions allowance.
A portfolio approach
Investors can either invest into an EIS-qualifying company directly or via an EIS fund. An EIS fund will then invest in a portfolio of qualifying companies – delivering tax reliefs once those investments have been made and a company has issued investors with the all-important EIS3 certificate.
This means there is likely to be a period of months until an investor’s money is fully invested and all of the tax reliefs are available. EIS investments must also be held for a minimum of three years in order to validate the tax incentives.
Income tax relief
As well as the feel-good factor that comes with helping small and medium-size enterprises (SMEs) in the UK to grow, a key driver of investment into EIS is the 30% income tax rebate. This income tax relief also provides flexibility as it can be used to offset income tax already paid or payable in either the current or previous tax year on an investment of up to £1m. Furthermore, if investing in ‘knowledge intensive’ businesses, that annual limit doubles to £2m.
Another popular feature is that capital gains from an EIS investment are free from capital gains tax (CGT) and an EIS investment also allows investors to defer a CGT liability. This means EIS can especially benefit anyone facing a CGT bill after selling a business or an asset, such as an investment property.
The tax reliefs do not end there, however – loss relief also plays a key part. Indeed, investors can avail themselves of loss relief if any one of the companies in an EIS portfolio exits at a loss.
If that happens, the investor can offset that loss against taxable income in the year the loss occurs, or even carry it back to address income tax liabilities from the previous tax year. Crucially, it is available even if the rest of an EIS fund is in profit and can be taken as a normal capital loss too.
In addition to supporting growth via a government-backed scheme, one of EIS's most compelling features is its eligibility for business relief. This means, if an EIS investment is held for at least two years including at death, business relief can exempt the investment from inheritance tax (IHT).
And as IHT is usually a particular focus for investors at an age where they may also be drawing down from a pension, the combined income tax and IHT benefits can deliver a highly effective combination. Bear in mind, however, that EIS investments are not tradable or readily realisable, so investors should be comfortable with a long-term investment horizon.
To support SMEs effectively, EIS investments typically focus on generating long-term growth rather than offering a regular yield. This means that, in addition to attractive tax reliefs, EIS offers investors the opportunity to access exciting, high-growth businesses across a range of sectors that have the added advantage of being mostly uncorrelated with mainstream investments.
And, as an example of the diverse scope of opportunities available, the Puma Alpha EIS fund has recently invested in a high-performing pub and casual dining group, a professional quality cycling clothing brand that exports to 50 countries, an auto wheel manufacturing business with supply contracts to several leading performance car brands and a ‘destination’ garden centre business.
For investors looking for ways to complement their traditional savings routes while also benefitting from growth, EIS can provide a valuable solution.
An investment in the service carries risk and may not be suitable for all investors. Investors should refer to the Investment Details and Client Agreement, copies of which are available on pumainvestments.co.uk. Key risks include: past performance is not a guarantee of future performance, you may lose money, tax reliefs are not guaranteed, long-term investment, potentially illiquid investment.
This communication is a financial promotion issued by Puma Investments in accordance with section 21 of the Financial Services and Markets Act 2000. Puma Investments is a trading name of Puma Investment Management Limited (FRN 590919) which is authorised and regulated by the Financial Conduct Authority.