The chancellor may have unveiled a bonanza budget for savers, but he showed no signs of wavering on the reduction in the lifetime allowance or annual contribution limits for pensions. As a result, advisers are increasingly seeking new options for tax-incentivised savings, with venture capital trusts (VCT) and enterprise investment schemes (EIS) among the key beneficiaries.
The tax advantages of EISs are similar to those of a pension, but more generous. Providing the underlying investments made by the EIS are held for at least three years, investors receive 30 per cent up-front income tax relief, 100 per cent capital gains tax deferral for the life of the investment and 100 per cent inheritance tax after two years (provided the investments are held at time of death).
Any growth in the portfolio is free from capital gains tax and any losses can be offset against capital gains or income tax.
There are, naturally, investment restrictions, but these have been made less onerous in recent years. In order to qualify, investee companies are restricted on the maximum number of employees, the underlying trade of the company and a maximum amount of gross assets before and after the EIS investment.
John Thorpe, business line manager for EIS at Octopus, adds: “Over the years, the government has made slight changes to the rules surrounding EIS. These changes demonstrate the government’s support of EIS as it seeks to open them up to more investors, and to more companies looking for investment.”
Edward Guinness, manager of the Guinness AIM and Sustainable Energy EISs, points out that the extension of the gross assets limit from £7m to £15m, and the number of employees from 50 to 250 has meant that the lower end of the AIM universe – roughly 85 companies – is now available for EIS investment.
This means that there is now a good choice of investment strategies across the EIS sector.
Guinness, for example, provides a dedicated AIM EIS, investing in 6-12 AIM-listed companies. Octopus has also developed a range of EIS products with different risk profiles, including the Octopus Eureka EIS, which is invested in very small businesses across a range of industry sectors such as Calastone, Zoopla Property Group, and EKF Diagnostics, and aims to achieve significant capital growth. In contrast, the group’s Octopus EIS has a capital preservation mandate.
Mr Guinness says that stock selection will look very similar to that in a conventional portfolio. He adds: “We have a bias to companies with ‘traditional’ characteristics – visibility of profits, strong balance sheets and cash generation. The companies tend to be in sectors such as light industries, technology or early stage pharmaceuticals rather than the banks, utilities or insurers that dominate the larger company indices.”
He says that investing in AIM companies gives added transparency and also means that exiting from holdings is easier.
It is difficult to make generalisations about the performance of EISs. They are not readily comparable in the same way as, say, VCTs, so investors must drill down into the individual strategies to determine their credibility. Tax Shelter Report gives details of open EISs with individual prospectuses, which may hold performance data.
