EIS 2018 report (web)

8 9 2 EIS EIS EIS HIGHLIGHTS FROM OUR RESEARCH KEY FINDINGS TECHNOLOGY now accounts for nearly 28% of open offers - UP 38 % ON 2016 (Jan 2018) ALMOST 33,000 EIS INVESTORS CLAIMED INCOME TAX RELIEF in the year to April 2016 TAX PLANNING IS STILL THE PRIMARY REASON FOR 78% of advisers recommending EIS NEARLY 22% of open EIS offers still incorporate CAPITAL PRESERVATION in their strategies (Jan 2018) £1.86bn was raised in 2015/16 (HMRC data) 2 ND HIGHEST amount invested since EIS launched 24 years ago TOTAL INTERNAL RATE OF RETURN (IRR) for UK private equity 23.1% vs 16.8% for UK equities in 2016 74% OF ADVISERS see their use of EIS increasing over THE NEXT TWO YEARS UK IS HOME to over 500,000 HNWIS - a prime market for EIS investors MEDIA & ENTERTAINMENT accounts for nearly 34% of open EIS offers (Jan 2018) HMRC RECEIVED OVER 3,500 APPLICATIONS for EIS Advance Assurance in 2016/17 MOST COMMON minimum subscription for growth EIS funds is £25,000 OVER 1,100 “HI-TECH” COMPANIES were funded by EIS in 2015/16 EXECUTIVE SUMMARY REKINDLING THE SPIRIT OF EIS This year’s EIS report has a significant focus on the results of Philip Hammond’s 2017 Autumn budget - an event that many feared could have been a watershed moment for the scheme. This report delves into the new landscape that investment providers, financial advisers and investors will have to be mindful of when considering EIS, and also looks at the key trends that are influencing this area of the tax- efficient space. KEY THEMES THAT THIS REPORT FOCUSES ON INCLUDE: EIS is re-focusing on its investment case The Autumn budget and the government’s response to the Patient Capital Review (PCR), firmly positions EIS as a mechanism to support fledgeling UK businesses, as opposed to any hint of it being a tax dodge. The government is encouraging EIS providers to focus more on the investment case, where the tax dog should not wag the investment tail. Capital preservation no longer qualifies The two key overarching themes of the new risk to capital test are that EIS companies must display a commitment to growth and development over the long term; and that investment must pose a significant risk of loss of capital. This is not a real surprise to the industry, as the government had already imposed a growth test for companies to be EIS eligible in its 2015 budget. The new principles-based test is bound to generate some grey areas - but it means that EIS companies and investment providers will have to take on the responsibility of adhering to the government’s ethos of risk capital. On the other hand, the government believes that the more stringent rules that have been implemented will help HMRC to achieve its new aim of turning around Advance Assurance applications within 15 days. The risk profile of EIS continues to rise Naturally, as EIS is now primarily focused on growth companies, this raises the risk profile of EIS investments. However, the rising risk profile should not be seen as a negative; it solidifies EIS as a legitimate scheme - which should be seen as a positive for everyone involved in the industry. Some investment providers will no doubt have to pivot their strategies. According to MICAP data, in January 2018, nearly 22% of open EIS offers still incorporated capital preservation in their strategies. Another new government still fully behind the scheme Even as a government with a much reduced majority, Theresa May’s post- 2017 election administration revealed its authority to significantly change EIS. The Autumn budget also confirmed that the government is still fully behind EIS. In the run-up to the budget, there had been fears that the scheme would be withdrawn. However, the current administration clearly sees an integral place for EIS as a mechanism for supporting fledgeling UK businesses. Knowledge intensive companies now in the spotlight Knowledge-intensive companies can now benefit from an increased yearly investment limit (from £5m to £10m), and individual investors can now invest £2m into knowledge- intensive companies - as opposed to £1m in other EIS eligible companies. However, it appears unlikely that many investors will be able to take advantage of this increased headroom. The scheme is becoming less suitable for retail investors The most common minimum subscription for growth EIS funds is £25,000 - excluding the majority of retail investors. However, the UK is home to over half a million high net worth individuals (HNWIs) - which presents a huge, and largely untapped market for the EIS industry to target. Fees are rising Total fees that EIS fund managers charge are rising, even if the fees charged directly to investors don’t appear to be. Transparency around fees is likely to become top of mind for the industry going forward and, in the wake of MiFID II, it’s one of the main considerations that advisers should be aware of when recommending EIS. Investment providers are not struggling with demand Although the scheme may predominantly be the preserve of HNWIs - there is clearly no lack of demand for EIS investments. From our Industry Roundtable discussion, it became clear that some EIS funds were in fact struggling to supply capacity to the demand in the marketplace. Some providers cap their fundraising in order to prevent any deployment issues. This is a healthy sign that the market is buoyant, and also indicates that investment providers are being prudent with the capital that they receive.