EIS wealth builder
Enterprise Investment Schemes (EIS) were originally introduced to provide finance to small businesses from the private sector. In doing so, investors were incentivised with generous tax reliefs which enhanced returns when the investments succeeded and compensated them when the investments failed. Many investors remember this latter outcome only too well and some have been put off investing in EIS ever since.
However, EIS and the EIS market has evolved!
There are several different investment strategies available to clients which offer a diversification of exposures from the traditional portfolio of venture capital type investments. These include capital preservation strategies allowing investors to participate in popular, asset backed trading activities in infrastructure, industry, leisure and media sectors, all promising a more predictable outcome.
These strategies allow investors not only to have their investment returns enhanced or compensated by the EIS tax reliefs available, but they can also use EIS in conjunction with other investments, as a predictable wealth builder.
A high earning client who needs an alternative to pensions. They intend each year to make a similar contribution to EIS of £100,000. This will allow the investor to receive £30,000 per annum in Income Tax relief.
Now, here is the first bit of clever planning. Most capital preservation EIS investments seek an exit three to four years after the investment is made. Therefore, when the investor is looking to make their investment in year four, this could be funded by the proceeds of their first EIS investment that was made three to four years ago. In other words, their EIS investments become self-funding from year four onwards and they keep receiving 30% Income Tax relief every year.
If this was done in isolation assuming no growth or loss, the result would be that after 10 years, the client (in the example) would have £300,000 of EIS investment which would have cost them nothing because of 10 years’ worth of tax relief at £30,000 per annum.
Now for the second bit of clever planning. Instead of just receiving the tax relief each year, what if the investor reinvests it, say into an ISA? The client now starts to benefit from a compounding effect which further reduces their risk.
The example below models the outcome with some modest returns. Assuming capital preservation EIS investments over the past couple of years have returned an average of above £1.20 for every £1 invested. If a little more caution is applied and a return of £1.10 from each EIS investment, every three to four years, is achieved and the client’s ISA (or other investment) achieves a 4% per annum net return, the following total returns could be possible.
THE BLACKFINCH SOLUTION
Blackfinch have two EIS offerings; Asset-Focused EIS Portfolios and Media EIS Portfolios both of which have underlying investee companies which have been granted Advance Assurance from HMRC. Our dedicated team at Blackfinch are happy to work with you, the advisers to discuss how EIS can work for your clients. We can even provide case studies, ongoing support and training.
CAPITAL AT RISK
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