Changes announced in last week’s Budget – allowing investment in larger companies – will change that perception. Consequently, portfolio managers are likely to see increased interest from their clients.
New rules mean that soon EIS managers can invest as much as £5m per company (up from £2m) and in firms with up to 249 full-time employees and £15m gross assets. Previously the limits were 49 employees and £7m gross assets.
Bigger companies, bigger universe
The investment universe will grow because EIS managers can access larger, more established companies thereby reducing risk. Equally importantly, it will enable them to address the equity gap more effectively.
Good quality companies are being held back by lack of access to adequate funding, something easier to address with an annual investment limit of £5m per company.
For investors, this ability to back more established companies with up to five times more employees, which are less likely to fail, will be a significant new attraction.
With your average start-up or university spin-off, it is a sad fact that many do not survive. But, in future, we will be able to invest in companies that are further along the development chain and already have demonstrable track records of successfully selling a product or service.
Investment potentially becomes more about providing the backing to help more developed companies grow faster – which is also good for jobs and good for the economy.
Still not risk-free
Be in no doubt, investing in small, unlisted companies will always carry risks. While there will now be more companies to choose from, it does not necessarily follow that it will be easier to find good ones. The ability of a fund manager to select the best businesses will be no less important, so the ability to select a skilled fund manager will remain vital too.
And there will be some EIS managers who will still want to take the higher risk approach of investing in start-ups. The onus will be on the client portfolio manager to really understand the approach of each fund.
The EIS fund investment universe is likely to grow and the universe of investors willing to take advantage of the vehicle will grow too. Changes to the EIS regime already introduced have made the product significantly more attractive not just from an investment risk point of view but from a tax perspective too, particularly given the £50k cap on tax-relieved pension contributions.
Income tax relief on EIS has been raised from 20% to 30%. There is IHT relief at 100% and CGT relief of 100% on gains made by the fund as long as the investments have been held for sufficient time, plus loss relief of up to 65 pence in the pound for higher-rate taxpayers which helps limit the downside risk.
Doing your duty
Significantly, within an EIS portfolio the loss relief is applied to the portion invested in the failing company not the whole portfolio, so successes elsewhere are not used to offset losses and effectively reduce the loss relief.
Finally, returning to risk. The Chancellor’s warning in his budget speech on tax loopholes that will be retrospectively closed raises one more important issue. This is a government-blessed initiative, not an arcane, esoteric wheeze dreamt up by clever accountants at risk of being unraveled by the HMRC at great and unexpected cost to clients later. The five generous tax reliefs are valuable incentives for individuals to invest in EIS funds, which then deliver a kick-start to UK economic growth. You might consider EIS as a patriotic way to reduce tax!
In conclusion, risk may once have been a reason to avoid EIS funds; for many it has just become a reason to invest.
