Inherent strengths of an EIS portfolio

Introduction

We created these planning scenarios to help advisers create suitable strategies for their clients, including making best use of available tax reliefs. To keep our examples straightforward, we have not considered the impact of charges or illustrated a range of tax rates that may be relevant to different clients. These examples should not be considered advice, and client recommendations should be based on a comprehensive review of client objectives.

Our examples are designed to illustrate how EIS qualifying investments in general can work as part of a client’s portfolio. For information about our EIS investments, we have detailed product information available here.

Scenario

Claire has been a high earner for many years. She makes the most of her annual pension and ISA investment allowances every year, also making annual investments outside these wrappers from her incremental income.

She explains to her adviser that she would like to start directing some of her investment into private assets, and in particular early stage venture investments, in order to add diversification and growth potential. She understands that such investments are less liquid and higher risk than the core portfolio proposition, but is happy to take more risk with part of her portfolio in order to target different outcomes. She is also comfortable with tying up some of her funds in long term investments, as she expects not to access this part of her portfolio for many years, and hopes it will eventually complement her pension when she comes to retirement.

She wants to understand how best to access these opportunities as a retail investor.

A solution designed by the Government for retail investors

Her adviser explains the Enterprise Investment Scheme (EIS) to her. EIS is a tax relief  the Government introduced more than 30 years ago to encourage investment in early-stage unquoted companies with high growth potential.

Qualifying investments are made into the shares of exciting early stage, unquoted UK businesses which have the potential to achieve significant growth, but where due to the early stage in the company’s journey, the risk of failure is also material.

To encourage investment and reflect the risks, investors benefit from a generous range of tax reliefs, which in effect reduce the cost of investment, and boost post tax returns from successful investments.

How it works

• Money is invested into the shares of qualifying companies, to support the business during its early years as it seeks growth. An exit is provided if and when the company reaches a major milestone, such as a sale or listing on a stock exchange. In this way, investors are exposed to the potential for significant capital growth over the exciting early years of a company’s life. This is typically a period of 5-10 years.
• On investment, 30% of the amount invested can be reclaimed against income tax paid in respect of the year of investment, or the previous year. So for a £10,000 investment, £3,000 can be reclaimed.
• In the future, if a successful exit for investors is achieved and the shares held for 3 years and if the other EIS requirements are met, the growth in value will be completely free from capital gains tax. With EIS qualifying investments having the potential to grow to be worth multiples of their initial value, receiving proceeds free from 24% Capital Gains Tax (current rate) can result in a significant boost to post-tax returns.
• And if a company fails, investors are entitled to claim tax relief in respect of the loss suffered (after taking the benefit of income tax relief into account).

Investors typically create a portfolio of EIS investments, either by self-selecting individual qualifying companies, or by investing in a portfolio designed by a specialist manager with skills and experience in this sector. Investors benefit from tax relief when any individual portfolio company fails, no matter how well their portfolio is performing overall. This is incredibly powerful. It means that investors typically consider the maximum amount of capital at risk is only 39p of every £ invested.

An example outcome for Claire

Claire wasn’t aware of EIS until her adviser discussed it with her. She is pleased to hear there is a way for retail investors like her to access venture investments, and understanding the tax benefits provide a level of risk mitigation that she wasn’t expecting.

She and her adviser consider that making EIS qualifying investments with a portion of her non-ISA savings each year aligns well with her goals of taking more risk and adding non-correlated assets to her portfolio. She is also excited about the idea of following the companies she has backed as they grow.

Her adviser shows Claire how EIS tax reliefs can work across an illustrative example small portfolio of EIS companies, to both mitigate some of the loss when a company fails, and deliver tax free growth for successful outcomes.

Claire’s adviser reminds her that investments have to be held for at least 3 years in order for EIS relief claimed to be retained. However, as Claire will be investing into early stage companies with the expectation of holding them as they grow, and where there is no opportunity to exit until the company reaches a major milestone that enables investors to exit, she expects to hold them for more than 3 years.

Claire understands that if a company ceases to qualify within 3 years, relief will be withdrawn.

The investments described in this website will place your capital at risk. Past performance may not be repeated and is not indicative of future results. Tax reliefs are dependent on investors’ individual circumstance and are subject to change. An investment in a fund managed by Parkwalk must be made only on the basis of the fund’s Information Memorandum and Key Information Document. Parkwalk does not provide investment or tax advice, and the information on this website should not be construed as such.