HMRC this week issued its latest quarterly update for EIS funds raised
The latest stats for the most recent year (2014-2015) show funds subscribed into EIS companies reached an all-time high at £1.662 billion. This is an increase of around 6% on the previous year and demonstrating the rise of the EIS. The jury is still out on how much was raised in the year just finished (2015-2016). But, industry pundits are suggesting it will be another record year.
Looking at the graph for annual funds raised across the lifetime of the EIS, it is fascinating to track the major economic and legal reasons for the peaks and troughs. EIS investment reached a then all-time high back in 1999-2000, the peak of the dot-com boom. However, fell back sharply in the following few years. It then rose back to challenge historic highs but then fell back again during the financial crisis of 2008-2011.
Behind these headlines, there were rule changes which had a material effect on fund-raising levels. Between 2007 and 2011, EIS companies were limited to raising £2 million a year, which was very restrictive. After much lobbying, the EIS Association was successful in persuading the Government to increase the up-front income tax relief from 20% to 30%; and a year later, HMRC also agreed to put the annual fund-raising limit for companies up to £5 million. These two factors, plus the arrival of renewable energy, especially solar, caused a huge surge in EIS investing. The surge was from around the £1 billion a year level, up to over £1.5 billion starting in 2013-2014.
So, can the EIS keep on rising year after year?
The consensus among leading commentators is that it can and will. The principal reason for this is the increasing clampdown on tax relief on pension contributions. Wealthy investors who have reached the £1 million lifetime cap for pension contributions are increasingly turning to the EIS and its attractive cocktail of tax benefits, including exemption from IHT. The restrictions are not just on the lifetime cap but also on the amount of contribution permitted annually. From this year, anyone earning £210,000 per annum or more will only be permitted to put a paltry £10,000 a year into a pension pot.
As we have seen, the fund-raising totals are affected by the availability of attractive product offerings. Renewable energy has now finally departed the EIS market. This, combined with recent rule changes announced by HMRC, could have a limiting factor on fund-raising going forward. Evidence of this was the recent announcement by Octopus, the market leader, that they intended leaving the EIS market.
Could this be the year when for once there will be more demand in the EIS market than supply?
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.