In a series of articles commissioned by Intelligent Partnership, we asked industry experts RW Blears to share their thoughts on the current state of play in the EIS market. In the first article, written by Roger Blears, he considers some common mistakes he sees advisers making when they first encounter EIS.
Tax planning and tax-efficient investing can be one of the areas where advisers can really add value for their clients: research has shown that most consumers do not feel confident investing in these areas without professional help. However, for many advisers the need to advise on tax efficient investments only comes around infrequently and they do not have the opportunity to build up the same levels of experience with tax-efficient products as they do with conventional investments. For these reasons, advisers can have misconceptions about them. In this article Roger Blears outlines some of the most common mistakes he sees advisers making when they consider EIS.
1. The EIS is all about risk
Wrong. Most companies in Europe are small and medium sized trading enterprises (SME). An experienced SME management team, with its own money invested in the business, is more likely take sensible decisions which preserve value over the next three-to -five years. This is in contrast to their well-heeled peers at much larger companies, who may have to run their businesses to counter short-term trading on quoted markets.
2. EIS is solely about the tax breaks
Wrong. The EIS presents an opportunity for private investors to co-invest with the government on a 70:30 basis in the development and growth of SMEs which are run by experienced management teams.
However the tax breaks are important. EIS rewards long term investing for capital gains rather than short term profits. This is because EIS shares can be sold free of capital gains tax (CGT) and their value will not be taxed to inheritance tax if they have been held for two or more years at the time of your death.
Investors can also roll over their capital gains into their EIS investments and defer the CGT that would otherwise have been payable until the EIS investment is realised. At this point the CGT becomes payable at the rate in force at the date of exit. This is equivalent to an interest free loan from the Government of an amount equal to the CGT deferred.
The Government relies on shrewd investors who make capital gains to help them identify the worthy companies of tomorrow by encouraging them to reinvest their gains.
Worthy SME companies provide the backbone of our economy and pay corporation tax which more than justifies the upfront EIS expense which the Exchequer incurs by running the EIS scheme to encourage private investment. It’s a win win for HMRC.
3. EIS companies cannot hold property
Wrong. There are no restrictions that prevent EIS companies from owning real estate, provided it is used for the purposes of its trading business and is not used to provide overnight accommodation. For example, an EIS company can own a pub, a restaurant, data centres, laboratory research facilities and even a clay pigeon shoot close to expanding areas of residential development provided. In all cases, the property or land is used for trading businesses.
4. EIS companies cannot have their long term revenues underpinned by long term institutions
Wrong. If an EIS company provides a valuable service to, say, a leading investment bank and it is able to negotiate a long term contract with that bank that underpins its revenues for the next three or 20 years, it still qualifies for EIS relief.
5. All EIS companies are the same
There is a wide variety of EIS companies raising funds in a range of sectors. Of particular interest at the moment is the Cyrus Precision Engineering EIS fund.
6. An investor is better off investing on their own
This is rarely an advantage. Most of us do not have the time to sift good investment opportunities and those that do might be ill advised as they still have less time to monitor them effectively, or to enforce shareholder rights once the investment is made. An experienced EIS fund manager, who can negotiate a ‘club deal’ with the management team, is much more likely to be able to protect an investment than an investor could do on their own.
7. All EIS fund managers offer terms that are fair
Wrong. Most EIS fund managers will allow an investor to withdraw their uninvested cash at any time from their EIS fund and EIS shares after they have been held for seven years ,if not been realised before then. Such funds are categorised by the FCA as mainstream investment opportunities.
Some managers do not grant withdrawal rights to their investors. They are to be avoided, unless there are special reasons for their absence, for example the EIS fund may be a side car fund for a large private equity fund with which it will co-invest.
It is important to read the large print. If withdrawal rights are given you will see them there. If you have to scour the small print it makes sense to review another offering.
8. Can I apply for EIS relief if I buy second hand shares?
No. EIS relief is only granted in respect of new shares issued by a qualifying company.
Although investing in EIS might not be a mainstream day-to-day activity for many advisers, EIS should always be part of advisers propositions and be considered for the right clients as the tax-planning benefits are too powerful to ignore. Advisers don’t need to be daunted by this though, with a little research and due diligence they can easily move past the preconceptions and successfully educate themselves about the market and low interest small business loans. Visit:https://wowloans.net/ to seek multiple options in car finance loans.