EIS – What you need to know

The following is to provide some clarity on what the benefits of EIS investing are, direct investing or via a fund, approved or unapproved funds and breaking down some of the barriers in regard to what offers are available to the investor seeking tax efficient investment structures. For information about Seed EIS funds, please see our SEIS page.

If you are interested in investing in an EIS scheme, please take a look at our hybrid EIS/SEIS fund.

 

Tax efficient benefits for the EIS investor

30% income tax relief

30% income tax relief may be claimed against income tax paid or payable in relation to the current tax year on total investments up to £1,000,000 per investor.

Alternatively an investor can opt to treat an investment as having been made in the previous tax year, in whole or in part, such that 30% tax relief is available against income tax paid or payable for that year.

Capital gains tax deferral

Capital gains tax deferral on unlimited gains invested in qualifying companies, in respect of gains that arise within three years before and 12 months after the date of investment.

Tax free capital gains

There is no capital gains tax liability on gains on the disposal of shares which have been held for at least three years in EIS qualifying companies or, if longer, three years after the company commenced its trade.

100% inheritance tax exemption

Through the availability of BPR (business property relief), there may be 100% inheritance tax exemption on the death of the investor (or on certain lifetime transfers) for each individual investment that has been held for at least two years.

Loss relief

Loss relief (providing total tax relief of up to 61.5%). A loss on any qualifying investment in the portfolio, irrespective of the overall performance of the portfolio, can be offset by individuals against income of the tax year of the loss, or the previous tax year, or against capital gains (including against the tax liability that arises on the revival of any deferred gain) of the tax year of the loss and future years.

 

Types of EIS scheme available

If investing in a fund, what type do investors select: HMRC approved or HMRC unapproved, capital preservation or capital growth?

HMRC approved or HMRC unapproved EIS Funds

The only difference between an ‘approved’ and an ‘unapproved’ fund is that the approved fund prospectus has been reviewed by HMRC. Provided the approved fund invests at least 90% of its assets in EIS-compliant investments within the 12 months following fund closing, then investors in the fund will be treated as having made the EIS investments as at the date the fund closes and not, as is the case with an unapproved fund, when the fund actually invests in the EIS investments.

The majority of EIS funds are actually ‘unapproved’. If the investment is made in an unapproved fund income tax relief is available following each investment by the manager. If one assumes the manager takes up to two years to invest the fund and manages the timing of investment so that the fund is deployed equally over the two years, income tax relief is available across two tax years, all of which are at 30% (as currently legislated). There is therefore greater flexibility in regard to income tax relief.

The final consideration is the fact that as 90% of the capital must be invested within 12 months in an ‘approved fund’, investors should be sure that the fund in question has identified its deal flow as private investments take a lot of due diligence and time, and the 12 month clock is ticking.

Capital preservation or capital growth

Two types of EIS funds exist: capital preservation and capital growth.  

Capital preservation

Often asset-backed in some manner, these EIS funds have modest returns but the risk of capital loss is expected to be low. Over the last few years, HMRC has progressively diminished the use of tax benefits for investors with a second subsidy (Feed in Tariffs or FITs and Return of Capital or ROC), as well as investors who are hoping to reduce risk by owning physical assets that could be sold to reduce the impact of any losses.

Capital Growth

Capital growth EIS is where the fund manager is hoping to receive capital gain on their investment typically over a 4-7 year period, whilst benefiting from: income tax reliefs on their investment in the short term; tax-free capital gains and IHT relief in the medium to long term and; substantial loss relief should their investment fail. The perceived risk of such investment structures is higher, therefore the investor needs to know that they will benefit from a diversified portfolio.

EIS schemes – tax efficient investment with substantial downside protection

EIS investing is a highly tax efficient vehicle for investing with substantial downside protection in the form of loss relief. 

If you are interested in investing in an EIS scheme, please take a look at our hybrid EIS/SEIS fund.

Important Information

Note: Shares must be held for at least 3 years to receive most EIS benefits summarised above and readers are directed to http://www.hmrc.gov.uk/eis/ for full details on EIS investing. Your attention is drawn to the fact that this article does not constitute a personal recommendation. Mercia Fund Management Limited (MFM) is not authorised to provide specific and personal advice on the suitability of investments for a potential investor’s individual circumstances, risk tolerance or investment objectives. If you have any doubt about whether an investment in a fund such as an EIS Fund is appropriate you should consult a suitably qualified financial adviser. MFM is authorised and regulated by the Financial Conduct Authority in the conduct of its Investment Business.


 

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