From April 6 2016, the generation of electricity was added to the list of excluded trades for the Enterprise Investment Scheme (EIS)
Given the amount invested into renewables through the EIS, this change in legislation could have a substantial impact on the industry.
According to HMRC, over £600 million was raised into renewables in the 2012-13 and 2013-14 tax years, equating to 25% of the EIS market in 2013-14. The generous government subsidies accompanying EIS relief resulted in an attractive investment opportunity and a rush to capitalise on the structure prior to its end on April 5 2016.
The end of renewables?
Renewables coupled with Government subsidies are still eligible for Inheritance Tax Relief when investing in Business Property Relief (BPR) projects. Some will turn to IHT investing to take advantage of continued renewables subsidies and to help manage their portfolio; however, not everyone will be looking for IHT solutions. What then will people turn to in the EIS market?
Asset-backed investments – the new renewables?
EIS investments are inherently risky. Investors are given 30% income tax relief in return for the increased risk of investing in newer, start up companies.
This, however, does not change human behavior and there are always investors that are more risk adverse than others. Up until last year, many of these investors may have turned to renewables, but with the changes, asset-backed investments may be their chosen alternative.
Coupled with EIS relief, asset-backed investments provide some additional risk reduction for investors. However, with EIS investments it is important to understand which trades are eligible, and seeking companies with advanced assurance from HMRC in place may be the right approach. There are still opportunities to invest in companies with freehold buildings or long leaseholds, such as the leisure & hospitality sector and storage.
Predictions – post EIS asset backed investments
Given the role of renewables in the rise of EIS investments, is it possible for investments levels to continue to rise? Here at Enterprise our opinion is it, and it will. With the clampdown on pension contributions, wealthy investors who have reached the £1 million lifetime cap for pensions contributions are increasingly turning to the EIS.
The interest will be seeing how providers adapt to the market changes to provide investors with investments that fit their expectations and risk profile, while retaining the spirit of the EIS. With renewable energy out of the running, pensions being squeezed, and the introduction of Social Investment Tax Relief (SITR), Martin Sherwood asks, “Could this be the year when for once there will be more demand in the EIS market than supply?”.
Please note the tax treatment of the investments depends on the individual circumstances of each investor and may be subject to change in future. The availability of tax reliefs depends on the Company invested in maintaining its qualifying status.
Martin Sherwood has been closely involved in both Venture Capital Trusts (VCT) and Enterprise Investment Schemes (EIS) since their inception and is a founding director of the EIS Association, the official trade association of the EIS industry.
Martin is now a Partner at Enterprise Investment Partners, a venture capital boutique specialising in fund-raising for smaller companies through tax-efficient structures, with a particular emphasis on the EIS and Seed EIS.