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Since its inception, investors have put £25 billion into at least 30,000 companies qualifying for the Enterprise Investment Scheme (EIS). The UK government-backed scheme still offers many attractive benefits and features for investors in 2022-23. Below, our team at Bure Valley Group outlines five great reasons to consider EIS in your portfolio.
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#1 High potential returns
The companies which qualify for EIS are, by nature, earlier in their lifecycle – opening up the possibility to generate high returns if they scale quickly. To qualify, a company must have fewer than 250 employees and must have been trading for less than 7 years. In particular, EIS leans towards “knowledge-intensive” companies (KICs) which are carrying out new areas of research, development or innovation – potentially enabling them to disrupt existing marketplaces and key players with ground-breaking solutions. Many of the UK’s early-stage companies also work in areas that generate measurable, positive social impact – such as carbon footprint reduction. So, by investing in EIS, an investor not only helps the economy by stimulating job creation, but also the wider world by contributing to positive change.
#2 IHT-free shares
Looking to reduce the future inheritance tax (IHT) bill on your estate? EIS investments can be a great tool to consider. In 2022-23, IHT is levied at 40% on the value of your assets once they go over £325,000 (or, £500,000 if your estate includes a family home which you pass down to your direct descendants). EIS shares, however, can be passed down to your beneficiaries without IHT if they have been held for at least 2 years. This can be an attractive option for people in retirement with significant non-property wealth outside of a pension (e.g. shares and bonds). By moving them out of an ISA or general investment account (which do not automatically qualify for an IHT exemption) into EIS companies, an estate owner could pass down significantly more wealth to their loved ones.
#3 Immediate income tax relief
Not only do EIS investments offer impressive potential returns, but the risks usually associated with early-stage companies are offset, to a high degree, by tax reliefs offered by the scheme. In particular, an investor can claim 30% income tax relief on the value of an EIS investment, letting you claim nearly a third of the value back via your Self Assement tax return.
This is especially attractive to high net worth (HNI) investors, who could invest up to £300,000 into EIS-qualifying investments each tax year – or, £600,000 for KICs. This could allow someone to save £100,000 or £200,000 in taxm respectively. You do not need to claim income tax relief straight away, either. You can make a claim up to 5 years after you made the EIS investment (or, the tax year before using “EIS carry back”) – allowing you to choose the best time according to your unique tax situation.
#4 Capital gains tax (CGT) benefits
You may know that any capital gains generated from EIS investments will be free from CGT if you dispose of them – allowing higher/additional rate taxpayers to save 20% on non-property sales. However, a lesser-known advantage of EIS is that you can use the scheme to defer any other existing CGT liabilities – provided the gains you release are then invested into an EIS fund or company. In effect, this lets an investor to treat gains from a chargeable asset as though they were made in future tax years – allowing him/her to get the most from yearly tax allowances.
#5 Loss relief
By claiming back 30% of your investment value via income tax relief, your “at risk” capital is already lowered by investing in an EIS company. However, it is further lowered through the loss relief mechanism. This lets you claim back the value of your invesment (minus the income tax relief) at your marginal rate of income tax or capital gains tax. You can choose which rate to use according to what is most favourable to your tax situation. In theory, therefore, this could allow an additional rate taxpayer to reduce a total loss of £1 in an EIS investment to as low as 38.5p.
It is also worth noting that EIS investments can form a crucial diversifier within a wider venture capital (VC) portfolio. EIS companies operate in a wide sphere of sectors and areas of the UK, helping you spread out your risk across different industries, specialisations and management styles. You should, of course, choose a unique mixture of startup and early-stage investments that reflects your risk appetite, financial goals and investment horizon. Here, it may help to seek professional financial advice.
Interested in finding out more about the exciting startup projects we have on offer to investors here at Bure Valley Group? Get in touch today to start a conversation with our team and discuss some of the great investment memorandums we have available here:
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