The EIS industry faces an uphill battle this tax year following the withdrawal from the market of the industry’s largest provider and recent changes to the EIS rules, writes Emily Perryman of Shares magazine
Octopus has announced it does not intend to re-open its EIS Fund this year, citing the Government’s shift away from capital preservation schemes to smaller younger companies as the reason. I was quoted by Emily as saying that demand for good quality EIS schemes could exceed supply for the first time in many years. The disqualification of the very popular renewable energy schemes in particular has led to this potential situation. It is clear that the recent changes to the rules are intended to refocus the EIS on smaller, younger companies where there is trading risk.
But trading risk can be mitigated to a substantial degree by investing in schemes where the management are very experienced and have a demonstrable track record of high returns in recent years. A prime example of this is the Imbiba Leisure EIS Fund, where the Imbiba team have consistently produced outstanding returns from their London bar/restaurant investments, the most recent one being a whopping 5.7 times cash from their exit from City based Drake & Morgan.
Another way of mitigating risk is by focusing on asset-backing
So if an EIS company does not trade successfully, investors’ “downside” can be partly protected by the value of the underlying freehold property. An example of this is our current Titan Storage EIS Fund, which is developing a portfolio of freehold storage assets across London and the South East. The traditional pub model which has been popular for many years has been seriously affected by the new rule which prohibits the purchase of an existing asset or trade with EIS money, so it’s no longer possible to acquire an existing pub, do it up and sell it on after three years.
Octopus have announced that they will be focusing on VCTs going forward, and this led Emily to look at the main differences between VCTs and EISs. A key advantage of investing in a VCT as opposed to an EIS portfolio is the fact that you get your tax relief much sooner and it’s only one tax certificate. With EISs, you get a separate certificate for each company investment, which is very “fiddly” and they can sometimes take a long time to become available.
Another key advantage of VCTs over EISs is the availability of tax-free dividends during the investment term. EISs don’t pay dividends, simply because they are subject to tax – it’s far better to roll up the profit and pay it out in one go at the end free of tax. But the EIS has several key advantages over VCTs. The principal advantage is that they are exempt from IHT after two years, so are frequently used by older investors as a way of providing immunity from IHT on death.
In fact, best advice to people over 70 must surely be to liquidate their VCT holdings and transfer over to the EIS. Another advantage is that the minimum term for EISs is three years rather than five. So, all in all, VCTs and EISs are very different products with different uses and attractions.
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.