Martin Sherwood, Partner at Imbiba's broker Enterprise IP shares his views on EIS investments.
'Investors’ heads are increasingly turning to the Enterprise Investment Scheme (EIS), since it’s a tax-efficient way to back smaller companies.
An individual can claim tax relief of 30% on investments in the EIS. With investors allowed to invest up to £1 million each year through EIS, that gives them a maximum tax reduction in any one year of £300,000, provided they have sufficient Income Tax liability to cover it.
There are other benefits to investing in an EIS, too – including Capital Gains tax deferral on liabilities going back up to three years and a ‘carry back’ facility where investments can be applied to the preceding tax year.
For investors whose portfolios are well aligned with EIS, it comes down to what to keep in mind when choosing an EIS investment.'
What sort of track record does the fund management team have when it comes to investing in unquoted companies? Go back through their past investments to gauge previous successes. If the fund management team’s website doesn’t give any indication as to how it has fared previously, the alarm bells should be ringing.
2. Independent reviews
In the internet age, there is no excuse not to do your research. Independent reviews are a quick and insightful way to see the ‘true’ performance of an EIS, with three companies providing the analysis: Tax Efficient Review, Tax Shelter Report and MICAP Research.
Scrutinise the fund management team’s website in order to get a clear idea of their strategy. Does their stance – whether it be generalist or specialist – align with your risk profile and time horizons? Also, how well do they know the industries they are investing in?
4. Deal flow
A good EIS fund will comprise a strong flow of well-matched companies to invest in so that investments can be made at the optimal time in their life cycle to maximise investor returns and fully leverage the tax benefits EIS funds offer. Have the fund managers performed thorough and robust due diligence to ensure all companies are indeed “well-matched”?
5. Investment monitoring
A fund manager’s job is more than just selecting and investing – it’s crucial they carefully monitor underlying investments throughout the period of investment until exit. That means getting hold of monthly management accounts, keeping in regular contact with senior management, and maybe even appointing representatives to the boards of investee companies.
You can only exit from an EIS fund when the investee companies are sold, liquidated or listed. Therefore, the EIS manager must work with the investee companies to pursue an exit strategy that is beneficial to both the fund and its investors. As such, it’s well worth your while investigating the manager’s track record on exiting investments.
Find out more about Imbiba investments with Enterprise IP.