EIS guide

47 46 SUITABILITY SUITABILITY measure the risk an individual is willing to take (attitude to risk) and the risk an individual can afford to take (capacity for loss). Attitude to risk is subjective and based on a client’s personal opinions. This differs to capacity for loss which is objective in nature and based on fact. Liquidity and investment horizon Although the minimum holding period to qualify for the full income tax relief and tax-free growth is three years from the issue of shares or (if later) the start of the trade, in reality investors are likely to have to commit their funds for much longer and most EIS investments should be viewed on a five to ten year investment horizon. There is no large-scale active secondary market in unquoted shares and EIS managers do not offer buy-backs. Since EIS investments have no definite exit date, if clients anticipate an urgent need for their investment capital within at least three years, and very likely for several years longer, they should be advised against investing in EIS shares. Knowledge and experience Investors (or their representatives) must have the capacity to understand the nature of EIS and the associated risks. In general, EIS investors have experience of investing in a portfolio of more conventional retail investment products, and/or experience in business or a profession and, therefore, should be in a position to make informed decisions about investing in EIS. Portfolio balance and diversification It is not appropriate for a client to concentrate their wealth in EIS and, in most cases, EIS investors already have a substantial portfolio of conventional investments that meets the majority of their investment objectives. Investors should not be overexposed to high risk investments, illiquid assets or unquoted securities. The risks and disadvantages of EIS shares should be more than offset by the rest of their portfolio. Typically, EIS fund managers will deploy an investor’s subscription across multiple companies. The target number varies by manager, but typically is between two and 20. It is also important to diversify a client’s EIS portfolio across different EIS fund managers and EIS offerings. There are varying methodologies for selecting potentially successful EIS investments across managers and the structures, objectives and strategies of investment offerings also vary. Income Income distributions are not tax-free, and most EIS-qualifying companies do not pay dividends to their investors (they are investing to grow the business and are unlikely to have distributable reserves). For this reason, clients looking for income are not suitable for an EIS. Indicators of when an EIS recommendation may be right Does the client have a high tolerance of risk? Does the client have an income tax liability, a CGT bill, or an estate with a potential IHT liability*? Would a loss on the EIS investment have a materially detrimental effect on the client’s standard of living? Is the client able to commit their funds on a five to ten year investment horizon? Does the client have some experience of investing in a portfolio of more conventional retail investment products? Does the client have a diverse portfolio of conventional investments? Is the client looking for income from the EIS investment? *An income tax liability must be in the tax year of the share issue; a CGT liability can be up to 3 years after or one year prior to the disposal of the original asset; IHT relief must be applied for by the executors of the deceased’s estate or by the transferor in the event of a lifetime transfer. This is for guidance only and is not an exhaustive list. YES YES YES YES YES NO NO EIS may be suitable for client EIS may not be suitable NO EIS may not be suitable NO EIS may not be suitable NO EIS may not be suitable NO EIS may not be suitable NO YES EIS may not be suitable YES EIS may not be suitable