EIS: don’t buy just for the tax breaks

published 29 June 2018

902_MW_P21_Pensions — Not something you'll find in your EIS

The Enterprise Investment Scheme (EIS) should be more popular than ever. Offering generous tax reliefsto long-term savers with relatively deep pockets, the EIS is an obvious alternative for wealthy savers running up against lower annual caps on private pension contributions. Yet despite this, the number of people investing in the EIS fell by more than 15% in the 2016-2017 tax year.

In part, the decline directly reflects changes to the rules introduced in 2015, when the government attempted to reposition the scheme more in line with its original design as a vehicle to reward savers prepared to take significant risk. New rules preventing investments in companies older than seven years and a subsequent catch-all ban on EIS set up as capital-preservation schemes (such as funds that invest in pubs or self-storage) seem to have deterred some savers.

However, the subtler effects of the rule changes may also be part of the story here. In getting rid of capital-preservation schemes, the government has altered the very nature of the EIS, says financial adviser Dermot Campbell in Professional Adviser. "The investment timetable has completely changed," he says. Previously, EIS providers managed a well-oiled production line of capital-preservation schemes made available to investors in the run up to the end of the tax year, with half of all annual EIS investment taking place in February and March. Now, investors and advisers must seek out growth firms that meet the updated EIS criteria. As this can take several months, EIS should no longer be regarded as an end-of-tax-year investment.

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One reason for the recent dip in the number of EIS investors may simply be that would-be investors were not able to find and evaluate potential investments in time for the end of the tax year on 5 April. In which case, anyone considering the scheme should be looking for potential investment opportunities much earlier in the year. In fact, this could be a healthy shift. The way in which the UK offers tax breaks to investors through a variety of schemes that operate annually often prompts investors to think in terms of grabbing a tax break, rather than evaluating the underlying investment.

Would-be EIS investors have the option of investing in individual companies with EIS-qualifying status including many businesses on equity-crowdfunding platforms or through a managed fund of such businesses run by a specialist asset manager. The rules on qualifying companies are restrictive: among other criteria, they must have assets of under £15m, fewer than 250 employees, and be less than seven years old.

In return for investing in these businesses, which tend to have much higher failure rates than larger companies, investors qualify for tax breaks. They get 30% up-front income-tax relief, as well as tax-free capital gains, and the scheme also enables investors to defer paying tax on previous capital gains if they reinvest the profits on which the bill is due. In addition, investors can offset any losses incurred against tax. EIS shares are exempt from inheritance tax too. The maximum investment in EIS shares in any one tax year is £1m significantly more than the annual pensions allowance of a maximum of £40,000 (or £10,000 for those on the highest incomes).

As many as 288 investors transferred their pension savings into the Optimum Retirement Benefits Plan, often after being cold called by the scheme's representatives. The investors received loans from the scheme for up to 75% of their savings, effectively enabling them to cash in their pensions, with the remainder invested in the high-risk assets.In return, introducers and advisers to the scheme took sizeable commissions; Gordon Craig, one of the trustees, took almost £500,000 over a 12-month period. The scheme had all the hallmarks of an illegal pensions liberation scam, says the regulator those running the arrangement either didn't know how to operate within the laws or were not properly exercising their duties. The watchdog has now suspended Craig as a trustee, and the North West regional organised crime unit of the police has launched a fraud investigation.

If you had to pay inheritance tax (IHT) on the value of land or buildings that were part of a deceased person's estate, you can claim "sale of land relief" if you sell the property within four years of the person's death for less than it was valued at at the time of death. The appropriate person (usually the executor) may claim that the "sale value" should be substituted for the "value on the death", which should enable them to claim back some of the money paid. In the past five years nearly 15,000 families have applied for IHT refunds of this kind from HMRC, says Sam Brodbeck in The Daily Telegraph. For the 2016-2017 tax year, there were 2,110 claims on this basis, and more than 2,500 claims for just the period from April to December 2017. The number of claims is expected to keep rising as the housing market in the UK remains subdued, says Brodbeck.

David Prosser is a regular MoneyWeek columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments. David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor.