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The Enterprise Investment Scheme (EIS) is designed to help smaller higher-risk trading companies to raise finance by offering a range of tax reliefs to investors who purchase new shares in those companies.
All shares must be paid up in full, in cash, when they are issued.
Shares must be full-risk ordinary shares, and may not be redeemable or carry preferential rights to the company’s assets in the event of a winding up.
As EISs are not traded on an exchange, they can be illiquid. In addition, they must be held for a minimum of three years to benefit from income tax relief, so they can be quite inflexible. Capital is only returned when the underlying investment is sold, so should only be considered by individuals who can afford to lock money away for longer periods of time.
In addition, unlike other asset classes, there is no secondary market for EISs and you will not be able to sell it easily. Dependent on the investments in the EIS, your money could be tied up for a considerable length of time before you start to see a return, especially if you invest in start-up businesses.
As a priority, Dennis Hall, founder of IFA Yellowtail Financial Planning, says investors should look for providers with the expertise and skill to recognise good businesses and those who focus on the quality of investment opportunity.
‘Changes to the EIS rules have made them increasingly attractive from a tax perspective, but too many companies are devising opaque and esoteric funds to exploit the tax opportunities without enough understanding of the underlying investments,’ Hall adds.
‘For wealthier clients EISs are very attractive but you have to choose the provider carefully. EIS investing also has to be part of a broader wealth strategy and should really encompass the micro-investment end of asset allocation within a portfolio.’
Patrick Connolly, chartered financial planner at AWD Chase de Vere, warns against looking at the tax incentive alone.
‘The value of somebody’s investment could fall significantly and they might not be able to get their money back when they want it,’ he says.
‘An EIS investment is not appropriate for most people. It is most suitable for wealthier investors who have used their annual Isa and pension allowances and who understand and are willing to accept the high risks involved.
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