On a portfolio basis this is very valuable, as each company is considered separately, so loss-making EIS investments within portfolios that make money overall are not precluded from this relief.
Additionally, investors can:
- claim upfront income tax relief on up to 30 per cent of the investment amount, either in the year a company is invested in or the prior tax year;
- defer a capital gain;
- benefit from relief from inheritance tax, provided the investment is held for at least two years and at death.
How can clients invest in EIS?
Investors can invest in an individual EIS-qualifying company of their choice.
They would have to do their own research, which takes time and knowledge. And it is also unlikely they would have access to the same kinds of opportunities as an investment manager.
Naturally, many clients choose to invest with a specialist manager. These services invest funds on behalf of multiple investors in a portfolio of qualifying companies.
Having a specialist manager means ongoing oversight of the companies in the portfolio, the potential to influence board-level decisions and the expertise needed to successfully sell portfolio companies.
Investment through specialist EIS managers can be structured as an unapproved EIS portfolio or an approved knowledge intensive EIS fund.
The main difference between these is the timing of when an investor can claim tax relief. This becomes particularly important towards tax year-end. Read on for a short case study explaining this.
While tax regulations refer to EIS investments as funds, they should not be confused with other collective investments. An investor in an EIS fund will own shares in the underlying companies, rather than owning shares or units in any fund.
What are the risks?
Investing in early-stage, EIS-qualifying companies is unpredictable and suited to experienced investors who are comfortable with high risk.
EIS investments could fall in value, potentially to zero, and investors may not get back their investment.
Investments in smaller companies can be volatile, meaning the shares could fall or rise in value more than shares of larger, established companies.
EIS shares are unquoted, and they may be harder to sell than shares listed on the main market of the London Stock Exchange.
There are also tax risks to consider.
EIS tax rules could change in the future, while tax reliefs depend on the investor’s personal circumstances.
And there is no guarantee that the companies invested in will maintain their EIS-qualifying status. If a company loses its status within three years of investment, investors may be asked to repay income tax relief claimed.
The minimum holding period for a number of the EIS tax reliefs is three years from the date of investment in each company. But investors should be prepared to hold their investment for a long period, potentially 10 years or more.
