Building blocks

Changes to Enterprise Investment Schemes (EIS) for 2018

The rules have changed – Adrian Crowe explains the changes, and why you need to take them into account

Adrian Crowe, Senior Consultant, Financial Planning
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The Enterprise Investment Scheme (EIS) is designed to help small, higher-risk trading companies to raise finance by offering a range of tax reliefs to investors who purchase new shares in those companies.

The current tax reliefs available are:

  • Income tax relief
    30% income tax relief either in the tax year in which the funds are invested, or the previous tax year
  • Capital gains tax (CGT) deferral
    on gains arising within the last three years, the current year, or in the next 12 months
  • Inheritance tax (IHT) exemption
    qualifying investments will benefit from 100% exemption from IHT provided the investments have been held for at least two years and are still held at the time of death
  • Tax free capital gains
    exemption from CGT on individual holding disposal
  • Loss relief
    to be set against deferred capital gains or income

Protecting the principles

The November 2017 budget excluded tax-motivated investments where the tax relief provided most of the return for an investor, with limited risk to the original investment thus preserving an investor’s capital.

These schemes were previously very popular but were not in the spirit of entrepreneurial risk-based investments.

A principles-based test now applies to any new investment. This test ensures that the schemes are focused towards investment in companies for their long-term growth and development, with particular attention on 'knowledge intensive' companies which concentrate on innovation, research and development.

Schemes must be able to demonstrate that the risk they are taking with an investor’s capital means that the potential for loss is at least equivalent to the tax relief which an investor may claim.

The reasons for the change

The real aim of this new test is to prevent EIS companies from raising funds where there is a pre-agreed supply and sale for the company’s goods, which enabled the profit to be measured with reasonable certainty in advance, minimising the risk to capital.

HMRC wants to make sure that tax relief is only offered for investments in genuine small, entrepreneurial businesses which intend to develop and grow over the medium to long term.

This means the average period of ownership of EIS shares is likely to increase; five to seven years may be typical, compared to three to four years in the past. But the potential returns are also likely to increase.

Long term investments and the need for advice

The need for advice in this area has never been greater.

EISs are highly illiquid investments and investors may have difficulty realising their investment at a given time. Therefore, these schemes should only be considered as a long-term investment, i.e. over five years.

They also carry the risk of losing all or part of your capital investment so the return of your capital is not guaranteed.

We take great pains to identify suitable investment opportunities which may be attractive to clients willing to accept the high risk nature of these investments.

If you would like further information on this area, or to discuss potential investment opportunities, please contact us.

Adrian Crowe

Crowe Financial Planning UK Ltd is authorised and regulated by the Financial Conduct Authority.