An exciting year ahead for the EIS and new SEIS
Chris Elmes of Enterprise Equity, explains recent favourable tax changes and how this can be beneficial for companies qualifying for EIS.
The Chancellor's autumn statement last year confirmed the Government's intention on promoting the Enterprise Investment Scheme (EIS), in order to encourage investment into smaller companies.
One of the announcements that grabbed the headlines was the introduction of the new Seed Enterprise Investment Scheme providing investors with up to 50% income tax relief. However there have been more significant improvements to the EIS over the last twelve months, the increase in income tax relief from 20% to 30%, which came into force on 6th April 2011. Add to this the ability to invest up to £1m per annum with the benefit of tax relief (from 6th April 2012) and the ability to carry your income tax relief back to the prior year (already in force).
We think this cocktail of higher tax reliefs will significantly increase the interest and investment into EIS qualifying companies and funds and at the same time a much needed boost to the UK economy and the tax take for the Treasury in 2012.
Investors typically approach investment into the EIS on a single company portfolio or fund basis. This will usually involve making a series of separate investments into individual companies to create an EIS portfolio or by investing into a generalist EIS fund. However, increasingly we are seeing clients and advisors investing into several funds creating an EIS fund of funds model or multi-EIS manager approach.
Investing in a range of EIS companies or funds can provide a form of lumpy income by producing tax-free lump sums as each investment exits. If you invest 1p and obtain both 30p income tax relief and CGT deferral, and the investment yields a return of 150p after say three and a half years (more than 100% uplift on the net of tax cost), you can pocket the 50p free of tax, and re-invest the original 1p, which has the effect of re-deferring the historic capital gain and paying you a further 30p in income tax relief!
So what kind of investment performance should you expect? The nature of EIS portfolios is greater peaks and troughs than a conventional mainstream portfolio. So, out of ten holdings, one might be spectacular, two satisfactory, five indifferent and two outright losses; but the overall performance, after taking into account the tax benefits, including loss relief which can limit loss to 35p in the 1 for a top taxpayer, might be higher than a mainstream portfolio.
As a result of the changes already made and those on the way it should be an exciting year ahead for the EIS and we believe there be a revival this season of solid generalist EIS funds on the one hand and asset-backed and renewable specialist funds on the other, like farm shops and solar PV respectively.
Chris Elmes is head of investment promotion at Enterprise Private Equity, www.enterprisepe.com, who are specialists in the EIS having provided EIS investment opportunities since its inception in 1994, and whose partners are founding memebers of the EIS Association, the industry trade body.