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What is an EIS fund?
An EIS fund is a managed investment vehicle that raises finance from individuals for the purpose of investing in select EIS-eligible ventures. 'EIS' stands for Enterprise Investment Scheme, an HMRC-run scheme that helps younger, higher-risk businesses raise finance by offering investors generous tax reliefs.
EIS funds offer a simple way of building investors a portfolio of early-stage businesses, or startups. the decision of which opportunities make up your portfolio is made for you by the fund manager – or determined automatically using a sophisticated algorithm, as in the case of Fund Twenty8. This allows you to gain exposure to a greater number of sectors and opportunities than if you invest only in the sectors with which you are familiar.
There are two different types of EIS fund: HMRC ‘Approved’ and HMRC ‘Unapproved’. While the two types differ in several ways when it comes to tax planning and administration, the most significant difference is that with an Approved fund, it is impossible to carry back Income Tax relief to the previous tax year.
It's also worth noting that with an Approved fund, you'll be issued a single EIS5 certificate for your investments, while with an Unapproved fund you'll receive an separate EIS3 certificate for each individual investment the fund makes on your behalf.
For more information about Approved/Unapproved funds, see the HMRC website.
What tax reliefs can I expect?
The Enterprise Investment Scheme is one of the most generous tax relief incentives available to investors in the UK. The tax reliefs afforded through EIS are:
- Individual Income Tax relief of 30% on up to £1m invested per tax year (or £2m per tax year as long as at least £1m of this is invested in knowledge-intensive businesses, for example, life science businesses)
- 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
Active vs passive funds
When looking to invest in an EIS fund, one of the first things to consider is whether you want to put your money into an active or a passive fund.
When you invest in an active fund, your money goes to a fund manager who picks investments based on their own research, intuition and expertise. With a passive fund, a set of rules define an index which then determines what the fund invests in.
An example of a passive fund is our own Fund Twenty8, which uses a specially developed algorithm to pick and choose opportunities to back based on how much is invested into them through our platform. At its simplest, a passive investment fund mitigates human error from investment decisions.
Points to consider
EIS funds come in all different shapes and sizes, and while there are many potential benefits to each, you need to do your own research to figure out which one works best for you. Here are a few questions you should consider.
How many sectors does the fund invest in?
Most funds specialise in a single sector or area, which can be both a benefit and a drawback. Funds that focus on one sector tend to have a management team that's particularly experienced in that field, and is therefore likely to be well equipped to assess those types of opportunities.
On the other hand, by investing all the cash you've set aside for EIS opportunities into a single sector, you're exposing yourself to the chance of that sector experiencing a negative change and it bringing down your entire portfolio; think, for example, of how a shift in oil prices can affect a vast number of investments within that sector. By building a portfolio of uncorrelated investments across multiple sectors, you reduce that risk.
How many companies will the fund invest in?
Most EIS funds invest in five to eight companies per fund, although there are some that invest in many more (see Access EIS).
How much will you be paying in fees?
This is something to bear in mind as EIS funds can charge significant fees. Most funds will charge fees in line with traditional VC models (2% management for five years plus 20% carry), but this does differ from fund to fund.
Are you prepared to wait five+ years for a return?
EIS funds are generally an illiquid investment: once you’ve invested, you will be 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). Realistically, you are unlikely to see returns for five or more years.
SyndicateRoom's EIS funds
Access EIS tracks performance data of over 1,000 active startup investors. It then selects and co-invests with some of the best-performing “super angels” with the aim of replicating their collective success.
Access EIS aims to diversify your investment across at least 50 super-angel-backed startups to minimise risk and capture as many potential “blockbusters” as possible.
As the UK's first and only passive EIS fund, Fund Twenty8's focus is on diversification. By using a specialised algorithm, the fund follows the investment decisions of some of the country's savviest private investors to automatically build you a portfolio of no fewer than 28 EIS-qualifying businesses across different sectors.
Our Growth Fund complements Fund Twenty8 by targeting six or more later-stage companies from SyndicateRoom's portfolio. Since we've worked with these businesses in the past, we are able to draw on our established relationships to cherrypick which businesses to back. Additionally, as we do not want to miss out on any external rounds we think are outstanding, we do reserve the right to invest outside of SyndicateRoom alumni.
EIS fund performance
As our funds are relatively new (Fund Twenty8 first closed in 2017, Growth Fund in 2018), it will still be some time before we can show how these funds have performed. What we can disclose is the final portfolio for the first iteration of Fund Twenty8, which finished deploying this year. As of September 2018, the portfolio's paper value had grown to 108%. Its final portfolio is a testament to the fund’s mission: to deliver investors a large and diversified portfolio of at least 28 investments.
- 233 investors took part
- Invested a total of £4.55m
- Diversified over 32 investments
- Across 10 sectors
Alternatives to EIS funds
Putting money into an Individual Savings Account (ISA) can give you favourable tax arrangements on up to £15,000 invested per year. ISAs come in two major forms, Cash ISAs and Stocks and Shares ISAs. ISAs are exempt from Income Tax and Capital Gains Tax.
Venture Capital Trusts (VCTs)
Venture Capital Trusts, commonly referred to as VCTs, are similar to EIS funds in that they were designed to allow you to spread your investment across a range of small higher-risk trading companies whose shares and securities are not listed on a recognised stock exchange.
Cutting out the banks and many other intermediaries, peer-to-peer loans – or P2P loans for short – allow you to lend money to individuals or businesses through online matchmaking services. In terms of potential returns, P2P loans are significantly riskier than savings accounts and as such can offer lenders higher returns (potentially 4%, 10% or more).
Investing directly in EIS opportunities
Of course, if you're looking looking to invest in EIS-eligible opportunities, you can always take matters into your own hands and handpick your own individual investments through a platform such as SyndicateRoom.
The drawback of this method is that it leaves all the due diligence to you, meaning that you will need to spend time researching your options and deciding how much to invest. While time-consuming, this can be an immensely exciting and rewarding process, particularly if the company you invest in goes on to be the next unicorn.
Tax-efficient investing in a digital world
Want more information about how the EIS is impacting UK investing? Download your copy of our free guide. Featuring an analysis of UK investor trends, EIS case studies and a four-page EIS cheat sheet.
The information on this page does not constitute financial advice and is provided on an information basis only, based on research using the following sources: