FINANCIAL Services is a fast moving industry. Less than ten years ago the ‘choice’ faced by many IFAs largely centred around "do I pick good old with profits or one of those ‘potentially risky’ unit trusts" for my client to invest in. But that was then and this is now and despite the fact that IFA numbers are shrinking, the alternatives available to those that remain are increasingly diverse.
Once the playground of the City traders and the highest of the high net worth investors, Enterprise Investment Schemes are one form of investment that has made great strides toward the mainstream in recent years.
But like many of the more complex alternatives on the market today, an EIS investment is not for everyone and is certainly not, as many IFAs like to put it, something for widows and orphans.
"They are certainly one of the riskier investments that are out there," says Ben Yearsley, investment specialist at IFA firm Hargreaves Lansdown. "But being one of the riskiest investments they also have some of the best tax breaks.
"As long as you go into the investment aware that you could lose some or even all of the money invested or could make two three or four times the amount invested then that is fine.
"It is difficult to be generic about EIS investments because they are individual companies that you are trying to assess rather than a fund manager."
Adrian Shandley is MD of Premier Wealth Management, a typical UK IFA firm in may ways looking after the ‘ordinary’ clientele.
And Shandley, like many IFAs only utilises EIS on an occasional basis. "There just is not that much call for them within the bank of clients that we look after," he says.
"We prefer to keep away from the ‘riskier’ investments but EIS investments have their place , it is just not usually for the man in the street."
So what exactly is the Enterprise Investment Scheme? According to EISA, the trade body for the EIS industry, it is "a government scheme that provides a range of tax reliefs for investors who subscribe for qualifying shares in qualifying companies."
So to many, this form of investment is governed by another tax break and there are plenty to take in. Indeed, there are five current separate EIS tax reliefs Even the trade body dubs the investment as "appropriate for those investors who wish to include in their portfolio some ‘high risk’ comp`anies."
EIS tax benefits
Income tax relief - Provided an EIS qualifying investment is held for no less than three years from the date of issue, an individual with no more than a 30% interest in the company can reduce their income tax liability by an amount equal to 20% of the amount invested. The minimum subscription is £500 per company and the maximum per investor is £400,000 per annum. Where an individual subscribes for qualifying shares before 6 October in a tax year, a claim may be made to carry back one half of the amount subscribed to the previous tax year, subject to a maximum of £50,000.
CGT Deferral Relief - Tax on gains realised on a different asset can be deferred indefinitely, where disposal of that asset was less than 36 months before the EIS investment or less than 12 months after it. Deferral relief is unlimited, in other words, this relief is not limited to investments of £400,000 per annum and can be claimed by investors (individuals or trustees) whose interest in the company exceeds 30%. Where gains arise on the EIS investment, taper relief also applies which, in the right circumstances, can reduce historic CGT liability to 10% and this can be done on a sequential or serial basis
CGT Freedom - No Capital Gains Tax payable on disposal of shares after three years provided the EIS initial income tax relief was given and not withdrawn on those shares.
Loss Relief - If EIS shares are disposed of at any time at a loss, such loss can be set against the investor's capital gains or his income in the year of disposal. The net effect of this is to limit the investment exposure to 48p in the £1 for a 40% tax payer if the shares become totally worthless.
Inheritance Tax Exemption - EIS Investments are exempt from Inheritance Tax after two years of holding such investment.
A spokesman for EISA said: "The rules governing the EIS are complex and interrelated with other legislation so it is nearly always essential to consult a professional who is experienced in this area.
"It is a very specialised area and you should check the credentials of the firm to make sure that it is sufficiently expert in the subject of EIS to be able to provide worthwhile advice. "Many firms do not have this expertise and accordingly they may put you off investing, or seeking investment, via the EIS route."
One industry which has taken advantage of the fundraising opportunity available through EIS’s is the film industry. Indeed as EIS schemes rose across the last 12 months or so, so did the number of film investment opportunities within this investment form.
As the government closed the ‘sale and leaseback’ Section 43 clause many predicted the demise of the UK film industry. However the opposite probably applies. As one door closed, another one, through EIS schemes opened up. "It is great to see EIS being used properly," added Yearsley. "fThey have done this within the film and TV industry. That way people are not just investing for the tax breaks, which, perhaps, was happening more so with sale and leaseback."