23
PLANNING EXITS FOR INCOME
In this section we examine the possibility of reinvesting the gains from EIS investments in other EIS offers, and using ‘exit focused’ EIS
investments to try and build a tax-free source of annual income for the future. The spreadsheet we used to calculate the returns
is available on request from
METHODOLOGY
We looked at a hypothetical strategy where the investor has a surplus £10,000 annually and has used (or nearly used) their lifetime allowance
within their pension and their annual ISA allowance. Clearly we are thinking about wealthier investors here, perhaps nearing retirement age
and mortgage free home owners.
By investing the annual £10,000 surplus into EIS schemes with an exit focus, the capital can be recycled into another investment at exit.
In our simple example we have recycled the capital every three years and assumed each investment returns 1.3x capital
(equivalent to 10% simple annual growth).
We implemented this strategy with the surplus £10,000 a total of eight times (Pots A–H in the table below). This means that Pot A can be
crystallised in year 10 and the total return of £21,970 can be taken as a tax free gain – and the same can be done with all the subsequent
pots until year 17, providing a tax free annual income – potentially in the early years of retirement when spending is highest.
MORE COMPLEX SCENARIOS
Of course in reality the initial investment amounts are likely to fluctuate; as client circumstances change the level of returns will vary greatly, EIS
managers may take longer to achieve an exit than planned at the outset and advisers and investors may work over differing timeframes.
We carried out similar research with company returns set at levels based upon NESTA research (56% return less than cost, 35% return 1.5x cost
and 9% return >10x capital) and randomly distributed through our scenario. As you would expect, the ‘income’ taken as the investor starts to
exit was much more erratic, but still almost always positive each year, with some years providing significant returns in the tens of thousands.
MORE COMPLEX SCENARIOS
Investment 1
Investment 2
Investment 3
Final Exit
Pot
Initial
In Year
Return Timeframe Return Timeframe Return Timeframe Total Return In Year
A
£10k
1
0.5
3 years
1.5
3 years
0.5
3 years
£3.75k
10
B
£10k
2
10
3 years
0.5
3 years
0.5
3 years
£25k
11
C
£10k
3
0.5
3 years
1.3
3 years
0.5
3 years
£3.25k
12
D
£10k
4
1.5
3 years
0.5
3 years
1.5
3 years
£11.25k
13
E
£10k
5
0.5
3 years
1.5
3 years
0.5
3 years
£3.75
14
F
£10k
6
1.5
3 years
0.5
3 years
10
3 years
£75k
15
G
£10k
7
0.5
3 years
1.5
3 years
0.5
3 years
£3.75
16
H
£10k
8
1.5
3 years
0.5
3 years
1.5
3 years
£11.25
17
Totals
£80k
£137k
PLANNING EXITS FOR INCOME (£ ‘000s)
Year
1
2
3
4
5
6
7
8
9
10 11
12 13 14 15
16
Pot
Taking Profits As Income
A
10
13
16.9
21.97
B
10
13
16.9
21.97
C
10
13
16.9
21.97
D
10
13
16.9
21.97
E
10
13
16.9
21.97
F
10
13
16.9
21.97
G
10
13
16.9
21.97
H
10
13
16.9
Initial Investments
Re-Investing Gains
CONCLUSIONS
As the NESTA research indicates, small company investing can be risky and therefore a portfolio approach is necessary. If only one in 10
investments is going to be a stellar performer, this suggests that a portfolio of 28 investments would be optimal to give a 95% chance of
including the high performer. This level of diversification may be beyond many investors’ resources, which leaves advisers with a couple of
options: either using a fund or choosing to invest in lower risk, exit focused EIS opportunities. These are often based around established
businesses with predictable revenue streams and are very different to the growth focused investments EIS is traditionally associated with.
If the emphasis is on exit focused EIS, they can be combined in a portfolio approach similar to the one we’ve outlined here and advisers can
help clients build a satellite portfolio of tax efficient investments that will provide a regular stream of capital gains in the future.
