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Best Enterprise Investment Schemes

EIS have a number of tax planning purposes but are only suitable for higher earners with a high risk appetite. We go in search of the best options
March 18, 2015

Enterprise Investment Schemes (EIS) offer higher earners a number of tax planning strategies. However, it is not enough just to bung your money into any EIS: these are high risk investments so it is very important you choose the right type of EIS, and within that category try to pick the ones with a better record.

First it is important to understand the different types of EIS on offer.

Some EIS invest in a single company, which makes them higher risk, while others hold around 10 investments. "We rarely go down the single company route," says David Goodfellow, wealth planning director at Canaccord Genuity. "We prefer EIS that take a portfolio approach and go for managers with a good track record."

Most EIS investments can fit into one of three broad categories:

■ Capital preservation: investment in lower-risk companies, usually asset backed or with strong revenues, with a focus on preserving the real value of capital and achieving the 30 per cent income tax relief and saving the 40 per cent inheritance tax. The capital is still put at risk but not to the same extent as in more speculative EIS investments, and the expectation is that returns will be much lower, to reflect the lower level of risk.

■ Exit focus: investment with a focus on a predictable exit as soon as possible after the three-year minimum holding period. Even if there is no growth and the investment simply returns the initial capital invested, the 30 per cent income tax relief alone would deliver a greater than 10 per cent compound annual return.

■ High growth: investment in order to support rapid organic growth, perhaps to establish or cement a competitive advantage or support a management buyout. This is perhaps the riskiest but also the most common form of EIS investing.

 

CAPITAL PRESERVATION

Matthew Woodbridge, vice president at Barclays Wealth and Investment Management, says that EIS focused on capital preservation such as renewables are easier to use for tax planning because you know when the shares are going to be allotted. After 6 April EIS will no longer be able to invest in renewables.

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But there are EIS with a focus on capital preservation invested in other areas such as pubs and energy infrastructure.

With EIS, the track record and experience of the manager in running investments in the given area is very important because it is difficult to gauge how they have been performing other than to look at how the manager's past investments have done.

You should also think about how the managers will get out of the investments and understand what you are investing in, and the strategy and the stage of development of the companies.

 

EXIT FOCUS

For EIS with more mature investments, Mr Goodfellow recommends funds offered by Oxford Capital.

Oxford Capital Growth EIS invests in six to 10 companies over around 12 months, and aims to exit over four to six years. It aims to return investors 2.5x the amount they invested net of charges and including the benefit of tax relief. Investors have to put in a minimum of £25,000.

Oxford Capital Growth EIS invests across a range of sectors, in companies in areas including consumer internet, financial technology, software, diagnostics and medical devices, and energy reduction.

Examples of companies this EIS has invested in include:

• Linkdex, which helps companies analyse how valuable their online content is and find ways to make it more valuable

• Outplay Entertainment, which develops games for mobile devices and which generates revenues from in-game purchases and advertising.

Mr Goodfellow also recommends Calculus Capital EIS Fund 15 which holds eight to 10 mature companies across a range of industries. It targets established companies with proven management teams, predictable cash flows and ability to meet a target internal rate of return of at least 15 per cent.

Examples of successful exits by Calculus Capital in 2014 include vaccine producer Scancell in April on which it made a 8.2x return, biotechnology company EpiStem in May on which it made a 1.96x return and contract caterer Waterfall Services in December on which it made 5.3x return.

 

HIGH GROWTH

For growth capital, he suggests Downing Growth 4 EIS Fund which focuses on early-stage, high-risk, high-potential return companies, with a principal focus on technology companies. Investments made by Downing EIS 3 include Claresys which develops and supplies specialist lenses used in surveillance and vision systems, Smart Matrix which has developed a product for treating skin injuries which means patients can avoid a second operation, and Curo Compensation which provides software for managing annual staff compensation.

For companies with asset backing you could consider Oxford Capital Infrastructure EIS which targets a return equivalent to 1.1x to 1.15x your net subscription and expects to exit its investments within four years. It typically invests in one to four companies and requires a minimum £25,000 investment.

It invests in asset backed companies which own and operate assets in areas such as anaerobic digestion, grid support and hydro electricity.

Puma EIS targets asset backed businesses across a range of sectors, and has a minimum investment of £25,000, and a good track record of making exits. It aims to exit investments over a three to five-year period. Investments have included Community Solutions, which puts money into schemes providing supported living accomodation in the UK and is secured on the properties. It has also invested in Saville Services, which provides specialist services to the building trade and Brewhouse and Kitchen, a pub owner and operator in the south of England.

Downing Pub EIS - Tranche 2 will invest in freehold or long leasehold asset backed pubs, targeting a lower steady return with relatively lower risk. It anticipates owning two to three pubs and aims to exit after five years.

You can find lists of open offers on websites such as www.taxefficientreview.com and www.clubfinance.co.uk.

 

Contact details

ProviderWebsiteTelephoneEmail
Calculus Capitalwww.calculuscapital.com020 7493 4940info@calculuscapital.com
Downingwww.downing.co.uk020 7416 7780webinfo@downing.co.uk
Oxford Capitalwww.oxcp.com01865 860 760info@oxcp.com
Puma Investmentswww.pumainvestments.co.uk020 7408 4050

 

Risks of EIS

EIS are not listed on the stock market like VCTs so it is not as easy to get information about them, and the extent to which they report is down to the discretion of the manager.

Early-stage unquoted companies can be difficult to sell and you need to hold EIS for a number of years to benefit from the tax breaks as well as give the underlying investments time to mature. Just because EIS qualify for income tax relief after three years doesn't mean the companies they invested in are ready to return your money.

You have to wait until the underlying investments are sold via a trade sale or flotation, although there are some instances where the EIS manager will buy back your shares.

"Investors need to understand the characteristics of the particular EIS investment, but, despite the three-year minimum holding period for tax purposes, investors will often need to be prepared for a long time horizon before they hopefully see an exit and returns, eg five to seven years," says Philip Rhoden, director at discount broker ClubFinance.

Returns from EIS can be lumpy, with many of the gains coming later on as the investments start to mature.

EIS make their profits from selling on their underlying investments, and if this is not possible for economic or other reasons this will hit the funds' returns.

Single company EIS are not considered retail investments so do not qualify for compensation under the Financial Services Compensation Scheme (FSCS) in the event of failure.

EIS can take on debt which can increase risk.

Some EIS providers will ask you to fill in a form that declares that you are a high-net-worth or sophisticated investor. Because this is a high-risk and complex area it may be worth getting professional advice.

EIS can also have high charges relative to mainstream funds, which often involve a performance fee.

For these reasons advisers suggest that you only invest in EIS if you are a higher rate taxpayer, and only put a small percentage of your assets into them, maybe up to 10 per cent.

 

Loss relief

However, EIS benefit from loss relief. The maximum loss a 45 per cent taxpayer will suffer in a single investment is 38.5p in the pound and it is not offset against other gains in the portfolio. You invest only 70p in the pound because of your 30 per cent EIS income tax relief. If this is all lost due to the investment failing, then you qualify for loss relief at your marginal income tax rate: for 45 per cent taxpayers this equals 38.5p.

 

EIS loss relief

Initial investment£100,000
Less income tax relief @ 30%£30,000
Net cash outlay for investment£70,000
If investment fell to £0 net loss£70,000 in 2014/15
Loss relief against income at 45%£31,500
Net loss£38,500
Percentage of original outlay38.50%

Source: Eisa