What is an EIS fund?
An EIS fund is a managed investment vehicle that raises finance from individuals and institutions for the purpose of investing in select EIS-eligible ventures. EIS stands for Enterprise Investment Scheme, an HMRC run scheme that – subject to each individual’s circumstance – offers impressive tax reliefs for those who invest in either an EIS fund or EIS-eligible ventures directly. There are two different types of EIS fund; HMRC ‘Approved’ and HMRC ‘Unapproved’.
The benefits of EIS funds
Beyond the generous tax reliefs that are offered through the Enterprise Investment Scheme (outlined below) EIS funds spread the risk of investing in early stage companies by investing in a portfolio of these ventures. Further, EIS funds are usually managed by individuals who have experience in the relevant sector and, in theory, should perform a higher level of due diligence on the companies seeking investment than you may be able to achieve on your own.
The main tax reliefs afforded through EIS are:
- Individual income tax relief of 30% on up to £1,000,000 invested
- No Capital Gains on the sale of shares held for at least three years
- Loss relief on your at risk investment multiplied by your tax rate
- No Inheritance Tax paid on shares bought through EIS and held for two years
Find full details of EIS tax relief here.
The downside of EIS funds
While there appear to be many upsides to investing in an EIS fund, there are also a few key points to be aware of.
First, due to their size, most EIS funds usually have a small investment management team, meaning they tend to focus the fund on a specific sector or area of business. This exposes investors to the risk of movements in that specific sector.
Secondly, although EIS funds do offer a broader portfolio to a single direct investment, they usually only invest in between five and eight companies per fund. Research by NESTA and Intelligent Partnership calculated a minimum portfolio size for early stage investments of at least 28 investments.
Thirdly, EIS funds can tend to charge significant fees for their work and in some cases, had an investor decided to directly invest rather than through a fund, they would have been able to invest an equal amount into one or two additional companies. Read more about SEIS and EIS fund fees.
Fourthly, while the tax reliefs on offer for EIS investments are significant it should be appreciated that these are risky investments. EIS is only available for companies who have fewer than 250 full-time employees and have no more than £15 million worth of assets. While these are large compared with the eligibility rules for SEIS, these are still generally early stage companies and are still considered a risky investment.
Lastly, these funds are generally an illiquid investment, once you’ve invested you are unable to get cash out easily and are unlikely to see any form of return for at least three years, the minimum time you must keep your shares to retain the tax reliefs. While you must hold the shares for three years, in reality you are not likely to see returns for five or more years.
Alternatives to EIS funds
We’ve brought together just a few alternatives to EIS funds to give you a flavour of the other opportunities on offer. Further, if you’d like you can learn more about alternative investments and how they can play a part of your wider investment portfolio.
Putting money into an Individual Savings Account (ISA) offers savers favourable tax arrangements on up to £15,000 pounds invested per year. ISAs come in two major forms, Cash ISAs and, Stocks and Shares ISAs which can be invested in qualifying investments. ISAs are exempt from income tax and capital gains tax on the investment returns.
Venture Capital Trusts (VCTs)
Venture Capital Trusts, commonly referred to as VCTs are similar to EIS funds in that they were designed to allow individuals to spread their investment across a range of small higher-risk trading companies whose shares and securities are not listed on a recognised stock exchange.
Peer-to-peer loans, or P2P loans for short, are loans either direct or through a fund to either SMEs or individuals. They offer investors who are interested in taking on a little more risk with their capital to generate returns in the order of 4% to 10% or more. Cutting out the banks and many other intermediaries, P2P can offer lenders higher returns compared to savings but it should be noted they are significantly riskier than a savings account. Find out more about peer-to-peer lending.
Investing directly in EIS opportunities
Instead of investing through a fund you can always opt to invest in EIS eligible ventures directly or through a platform such as SyndicateRoom. The benefits, as mentioned above, are in allowing investors the freedom to build a portfolio of investments as they decide. However, if you are investing on your own and are new to the space, we suggest carefully considering your options.
At SyndicateRoom we offer our members the opportunity to invest in SEIS and EIS opportunities directly or have a portfolio built for them through our unique passive eis fund, Fund Twenty8. All investments on the site are backed by an experienced business angel or professional investor who is investing their own money and leading the round.