Clients must be comfortable with the risks
Investing in EIS companies is high risk. An investment could fall in value, potentially to nil, and investors may not get back the full amount invested.
There are also tax, volatility and liquidity risks to consider.
Shares in unquoted companies cannot easily be sold, as it may take time to find a buyer. When investing in an EIS portfolio, an exit is only possible when each individual company is sold. So a client’s investment should be considered illiquid and a long-term investment.
The shares of unquoted companies can also fall or rise in value more sharply than shares in larger, more established companies.
A number of EIS tax reliefs depend on companies maintaining their EIS-qualifying status for at least three years. It is possible that a company might cease to be EIS-qualifying and EIS reliefs previously granted would need to be paid back.
HMRC could change existing tax legislation. Tax treatment also depends on personal circumstances.
A powerful way for investors to target high growth
For a company to qualify for EIS funding, it must be in the early stages of its growth journey. The company must also be unquoted (which includes being AIM-listed for these purposes).
Buying the shares of these kinds of companies can come with significant growth potential because they’re at the beginning of their growth curve. Of course, with this growth potential comes higher risk.
To compensate for some of the risk of investing in early-stage businesses, EIS-qualifying investments allow investors to claim several tax reliefs.
Losses are relievable (against income or capital gains tax), and growth is tax free. This is a powerful set of reliefs for a high risk, high potential growth portfolio.
Additionally, investors can benefit from upfront income tax relief on up to 30% of the amount invested, capital gains deferral and relief from inheritance tax.
An EIS opportunity this tax year-end
Has this planning scenario resonated with you?
Or perhaps you have a client that is selling down a portfolio of investments, and wants to defer their capital gains?
Maybe they want to diversify their portfolio but want to explore ways of retaining valuable loss relief?
We’ll be covering these scenarios and introducing the Octopus Ventures Knowledge Intensive EIS Fund in an upcoming webinar on 15 February 2022 at 11am.
The fund has a capacity of £25 million and will close on 5 April 2022 or when capacity is reached.
This investment is an extension of our evergreen Octopus Ventures EIS Service, which is managed by the same team behind Octopus Titan VCT, the UK’s largest VCT.
The fund structure allows clients who invest to carry back income tax relief to the 2020/21 tax year easily with a single EIS5 certificate.
The Octopus Ventures EIS Service is not suitable for everyone. Any recommendation should be based on a holistic review of your client's financial situation, objectives and needs. We do not offer investment or tax advice. Issued by Octopus Investments Limited, which is authorised and regulated by the Financial Conduct Authority. Registered office: 33 Holborn, London, EC1N 2HT. Registered in England and Wales No. 03942880. Issued: January 2022. CAM011772
