The ongoing growth of EIS

by Startacus Admin

Tom Britton, Co-founder of Syndicate Room shares insights on the continued popularity of the Enterprise Investment Scheme (EIS).

Since the Enterprise Investment Scheme (EIS) was launched in 1994, it has raised more than £24bn, and benefited 32,965 individual companies. But is the scheme still popular among investors today, and if so, what are the main attractions?

EIS and VCT are going strong

As far as its popularity is concerned, the short answer is yes. 

According to HMRC records, there has been a steady increase in the use of EIS since 2010, which is attributed in part to sustained low interest rates, increasing promotion and the involvement of fund managers. Between 2018-19 and 2019-20, the amount raised by all companies under the EIS scheme rose by £81m, and while some slowdown in investment can be expected as a result of the COVID-19 pandemic (look out for that report on gov.uk in May 2022), it’s unlikely that this will deter EIS’s upward momentum for long, if at all. By contrast, investment in the SEIS remained relatively flat for the same period, increasing by just £1m.

The amount invested in Venture Capital Trusts (VCTs) rose to £716m during the 2018/19 tax year, the highest level in over a decade and more than three times the amount invested in 2008/09.

What makes EIS so attractive?

EIS’s popularity can be attributed in part to what the scheme itself offers, but also to the changes occurring in investment and pension vehicles more widely. Cuts to pension allowances and restrictions on buy-to-let investing have only worked to drive the popularity of EIS higher, which, thanks to significant investment allowances and a suite of tax benefits and deferral options, has made EIS a sensible go-to for tax efficient investing.

What are the benefits of EIS investing?

Allowance

The EIS allows investors to claim tax relief on investments of £1 million per year. This rises to £2 million if at least £1 million is invested in Knowledge Intensive Companies (KICs). Investors can of course invest more than these limits but will not receive tax relief on the excess. They would however still qualify for capital gains deferral and IHT relief (see list of tax benefits below).

Because EIS investments allow income tax relief to be ‘carried back’, and applied to a previous tax year, investors can technically claim income tax relief on twice the stated allowance, investing, for example, £4 million in KICs, and deferring half to the previous tax year

Tax Benefits:

• Up to 30% income tax relief (with the option to carry back and apply relief to a previous tax year)

• Tax-free growth (On shares held for a minimum of three years)

• Capital gains deferral 

• Inheritance tax relief (On shares held for a minimum of two years)

• Loss relief on companies that fail

Versatility is king

A key aspect of EIS’s continued popularity is that investors can make use of the scheme in a number of ways to suit their investment habits and portfolio. Because the minimum investment required by EIS funds can be as low as £5,000, it can be a relatively affordable and straightforward way to diversify an existing portfolio. Or, thanks to its high allowances, it can be a useful vehicle for tax-efficient retirement planning. Investors can choose to invest in an EIS fund, where qualifying companies are selected by a fund manager, or to make individual EIS investments directly into companies. 

For more information on EIS and investing, download the SyndicateRoom EIS guide. 

ABOUT THE AUTHOR

Tom Britton is the Co-founder of Syndicate Room, a venture capital fund that uses data and diversification to maximise return potential.

 

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Published on: 25th February 2022