Susan McDonald, chairman of Calculus Capital, explains why her firm has seen a rise in EIS investors earlier in the tax year and why now is a good time for investors to consider deploying funds.

Susan McDonald, chairman of Calculus Capital, explains why her firm has seen a rise in EIS investors earlier in the tax year and why now is a good time for investors to consider deploying funds. The views stated here are those of the author and not necessarily endorsed by the editors of this publication.

Many sectors experience peaks and troughs of business tied to external factors like the academic or tax year. Historically this has very much been the case for Enterprise Investment Scheme firms, which would traditionally see a considerable inflow from investors from December onwards to a peak in late February/March as the end of the tax year approaches. However, over the past couple of years we have seen a marked change, with an increasing number of individuals investing in EIS funds in the “off seasons” of summer and autumn.

We see several drivers behind this trend, most importantly the growing appreciation that EIS funds should be seen as “year-round” investments.

As with Individual Savings Accounts, where investors scramble to use their ISA allowance before the end of the tax year, EIS investment used to be viewed as a “seasonal” activity where investment was mostly driven by tax planning considerations. This is no longer the case as increasing numbers of investors are made aware that income tax relief can only be claimed as and when investments into the qualifying EIS companies are made. Carry-back means investors can claim EIS tax relief on investments made in the current year against their liabilities in the preceding tax year (provided that year’s allowance was not exceeded).

EIS investing can be beneficial to financial planning:

1)    from a performance perspective, with loss relief providing downside protection of up to 61.5 per cent of funds invested, and unlimited upside;

2)    from a tax planning perspective;

3)    as a pensions supplement due to ever-lower caps on the maximum amount a person can save while still enjoying tax relief (the limit will be £1.25 million as of April 2014);

4)    to mitigate IHT as such investments fall outside of a person’s estate after being held for two years; and

5)    for portfolio diversification.

Range

The range of reliefs EIS funds provide make them one of the most tax-efficient investment vehicles available to UK taxpayers. The UK government has been proactive in providing attractive conditions for small and medium enterprises to gain increased funding, with the expectation that investment in businesses will increase their productivity resulting in growth for the UK economy.

As such, in 2011 and 2012, the EIS rules and benefits were broadened and improved. For individuals, the income tax relief available on EIS-qualifying investments was raised from 20 per cent to 30 per cent and the annual amount on which an individual can claim tax reliefs was increased from £500,000 to £1 million.

The scope of eligible EIS companies was also widened, creating a larger pool of companies which can benefit from the scheme (and a larger market for EIS providers to choose from): a company can have a maximum £15 million gross assets (up from £7 million), can have up to 250 employees (up from 50) and can raise up to £5 million (up from £2 million) in any rolling 12-month period.

Expanding the size and scope of eligible EIS companies plays to our strengths, allowing Calculus to increase our capacity for raising and deploying funds. We have historically invested in established and more mature companies with recurring revenues which are profitable or have a clear path to profitability. This reduces the risks of failure compared to smaller and earlier stage companies and allows our investors to receive not only the tax benefits but proven returns, as evidenced by our track record.

Timing is key

EIS funds are generally used proactively as a financial planning tool, and investment timing is crucial to this. While investors and advisers know that there is no need to rush to beat the end of the tax year because of the timing of tax reliefs, there are compelling reasons to invest earlier in the year. Virtually all EIS funds offer tax relief as each EIS investment into qualifying companies is made. This means that the earlier investors put money into an EIS fund the sooner the provider can make underlying investments, and deliver the tax reliefs.

Investors should be aware that due to the nature of the investment process, it may be some time before their funds are fully invested. Thorough due diligence on each prospective company could take from four to eight months. Our managed portfolios consist of approximately eight to ten companies and in reality, our clients can expect their funds to be fully invested within 18 months. 

The mechanism for claiming tax reliefs is straightforward. Investors submit an EIS3 form to HMRC to claim their tax reliefs. The process of obtaining an EIS3 form usually takes from two to four months from the date of investment into the qualifying company. As the original EIS3 form is required by HM Revenue & Customs, investors should keep these timings in mind during tax planning.

In response to demand for greater flexibility from our clients we now have several “open” periods each year when subscriptions are accepted. We are then able to invest the money that has been committed up to that point without having to wait for the end of the tax year, meaning that investors can claim tax reliefs sooner. We had a fund closing date on 5 April and 4 October of this year, and the next closing date is 12 December 2013.

As an EIS pioneer (Calculus launched the very first approved EIS fund back in 2000), we are delighted to see growth in the sector. Many now see EIS investments as an integral part of the financial planning toolkit - as we believe they should - but, as with so many things, getting the timing right can make all the difference to achieving the desired results.