Since initial changes were made to the rules surrounding Enterprise Investment Schemes back in 2015, Chancellor Philip Hammond announced additional measures in his 2017 Autumn Budget following concerns that EIS was not channelling enough capital to the right companies.
Originally set up to help to provide tax incentives in the form of a variety of income tax and capital gains tax reliefs to investors who invest in smaller, unquoted, trading companies, EIS had become a popular vehicle for investors who were willing to take on higher levels of risk with their investment capital. However, the Chancellor made the announcement that there was a need to make some improvements to “ensure that EIS is not used as a shelter for low-risk capital preservation schemes.”
The resulting change was to introduce a “risk-to-capital” condition – defined as “a significant risk that there will be a loss of capital of an amount greater than the net investment return” – in order to qualify for EIS status. In essence, HMRC is only making EIS tax reliefs available when investors are actually at risk of losing their capital when investing into an EIS eligible company.
Following the amendments, there has also been a renewed focus on the increased amount that can be invested into – and raised by – ‘knowledge intensive’ companies.
Knowledge Intensive Companies are businesses that are developing an Intellectual Property (IP) – be it a product or service – that can be trademarked or protected and will form the main source of that business’ income for the next ten years from the date they received the investment. Qualifying businesses must also either: spend a minimum of 10% of their total operating costs on Research and Development in each of the three years prior to the EIS investment or spend at least 15% in one of those three years.
Whilst reports suggest there has been a drop in the number of EIS investments that advisers are offering to their clients since the risk-to-capital condition was introduced, others are backing the Chancellor’s decision to tighten the criteria and bring EIS back in line with its original purpose.
It has also been noted that not enough UK investors are aware of the tax reliefs available through EIS.
Gonçalo de Vasconcelos, Chief Executive of investment platform SyndicateRoom, said: “EIS has been used by well-informed, well-advised wealthy investors because they have professional advisers behind them. And they have been using EIS for years and years as a way of managing their tax bills and to invest into high growth companies.”
But, he added: “The vast majority of UK investors don’t really know about EIS tax relief. That’s a real shame.”
Whilst EIS investments are acknowledged to be much higher risk than those in listed companies, anyone with money to invest, from £1,000 to £1m, can chose to do so in an EIS. Individual investors can now invest up to £2m in EIS eligible companies per year as long as £1m of that is into knowledge intensive companies.
Nathan Mead-Wellings, Director at Finura, comments: “As with any start-up business, there’s a higher risk of failure and investors can lose part of or the entirety of their investment to that company. However, for some investors, the opportunity to support innovative fledging businesses in the UK may prove worth the risk and work as part of a wider, diverse investment portfolio.”
If you would like to discuss EIS as part of your portfolio, please contact your Finura adviser.
Articles on this website are offered only for general informational and educational purposes. They are not offered as and do not constitute financial advice. You should not act or rely on any information contained in this website without first seeking advice from a professional.
EIS investments are complex products, which should be considered as being higher-risk investments and are not suitable for all investors. They may be appropriate as part of a diversified portfolio, giving access to an alternative asset class, but many involve long term investments and as non-readily realisable securities therefore should be considered illiquid and unsuitable for unplanned or early capital withdrawals.
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