Enterprise Investment Schemes
An EIS is an investment vehicle that provides funds and capital to small businesses that cannot otherwise get financing from traditional sources due to the tightening of the credit market. An EIS is an unquoted company that is not on a stock exchange and is most likely managed by a venture capital firm. These firms manage the investment objectives to protect investors and maximize investment returns. A good firm will have been involved in venture capital investing for several years and provide a solid track record of protecting principles and securing returns. Firms operate their EIS. Differently, some offering investments into single companies while others operate EIS funds in which you could invest into a fund of multiple companies, therefore diversifying your risk.
The benefit of tax protection that EISes offer has resulted in an increased demand among wealthier investors, with EIS being utilized as a strategic tool within their portfolios. The UK government increased tax relief from 20% to 30%, and the annual investment amount has been increased from £500,000 to £1,000,000. With the added benefit that the investment is exempt from capital gains tax and inheritance tax, EIS is increasingly the perfect vehicle for certain investors. More and more EISes have become essential within many investment portfolios as an integral tax relief tactic.
Seed Enterprise Investment Schemes
Not quite as large as the EIS, the SEIS provides a similar benefit and experience. The main difference is the annual investment amount, which currently stands at a maximum of £100,000 but offers an unprecedented 50% tax relief on the investment’s gains and value. However, this 50% is only applicable if the SEIS continues to comply with the SEIS rules and providing the investment is left for a minimum of three years. After three years, the investor can sell their stake, incurring no capital gains tax against profit realized. Furthermore, loss relief applies to any losses incurred.
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As of 2014, the upfront tax relief for the highest tax bracket investors equates to a 64% tax break and, when combined with a loss relief tax break of the further potential of 22.5%, equates to a total of 86.5% tax relief. The downside tax protection of almost 90% is unprecedented amongst all other investment vehicles and provides significant tactical value to certain investors.
As with any investment decision, you need to be careful in your consideration when choosing to use EIS or SEIS for your portfolio. It would help if you considered these tax relief options in your portfolio after you have exhausted other forms of tax mitigation. The first two that should be utilized are your pension and annual Individual Savings Account (ISA) allowance. These primary tax savings vehicles provide secure investment vehicles; ISAs offer amazing investment flexibility not available through EIS or SEIS. Another option includes VCTs – Venture Capital Trusts – which have similar strategic benefits to EIS or SEIS but are limited to £200,000 per year.
In deciding on further tax mitigation, you need to consider the portion of your portfolio that these tactical investments would make up. Conventional wisdom dictates that you should not put more than 20% of your holdings into risky opportunities, but that 20% could realistically surpass the correct use of the right investment vehicles. If you are hedging your portfolio against a known event that will increase your capital gains taxes or inheritance taxes, EIS and SEIS would be a viable way to mitigate those taxes in a given year. In this way, you could max out your contributions to these two tactical strategies to mitigate the known tax implications from another portion of your investment portfolio. You should be aware of these considerations before deciding on a specific EIS or SEIS company.
Another concern that you should be aware of is that EISes and SEISes are essential “locked-in” products. You need to be able to leave the investments locked in for a period of at least three years (and in some cases longer) to access the tax relief benefits – managers will generally look for an exit in or around year 4. Still, an exit could realistically take longer and is subject to market conditions. In this way, many EIS and SEIS companies are illiquid, and the secondary market for selling EIS/SEIS shares is therefore small. Taking the long view on these investments should be a natural consideration.
Choosing the Right EIS/SEIS
When deciding on the right company to invest in for tax mitigation, not all EIS/SEIS companies are the same. Choosing a company should not be done on impulse and requires effective due diligence to ensure that their investment philosophy aligns with your own. At the time of consideration, ask all the company’s same questions as you would when investing in any stock. By ensuring the company has a solid and proven track record of investments, open reporting functions that promote transparency, and an investment philosophy you agree with, you can feel comfortable with your investment.
By considering an EIS/SEIS investment, you consider an investment option that has a real potential for investment loss. It can be the right option for those looking for a high-risk option with an effective tax mitigation strategy as a small portion of their overall portfolio. EIS and SEIS investments can also be an excellent way for investors to dabble in venture capital investing without having to put up too much capital.
For more information, please visit: https://www.gov.uk/government/publications/the-enterprise-investment-scheme-introduction
Kuber Ventures – The Alternative Investment Platform for investing in EIS and SEIS funds or portfolios.
Kuber Ventures Limited
25 Sackville Street
London, W1S 3AX
Telephone: +44 20 7952 6685