By Matthew Cushen
In the last Autumn budget, the Chancellor announced changes to the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) as a result of his ‘Patient Capital Review’. He could have reduced the generous tax reliefs available, but he didn’t, he extended the reliefs available for ‘knowledge intensive’ companies – those that are truly innovative and are using research & development (in its broadest sense) to create new intellectual property. He also closed some loopholes that had created demand for ‘asset backed’ investments that were not the type of high risk/high growth entrepreneurial companies that the scheme were intended to support.
Unfortunately, the Treasury are no better at publicising the impact of these schemes and the reasons why investors could consider them for their portfolios. There are still relatively few investors that understand the 30% and 50% income tax relief that EIS and SEIS plus various other reliefs from CGT and inheritance tax. But numbers just published by HM Treasury show that in 2016/17 plenty of investors did see and receive the benefit:
- under EIS: 29,860 investors, invested £1,797 million into 3,470 companies
- under SEIS: 7,855 investors, invested £175 million into 2,260 companies (with around 3,380 investors making investment of over £10,000).
Investments in early stage companies are highly speculative. The tax reliefs available under EIS & SEIS mitigate much of that risk, but there is still a high risk to capital. But also high potential returns associated with buying into companies at a low early valuation. Any investor should spread risk and return across a portfolio of such early stage investments. Even then, the risk will not suit the appetite of many investors.
These seed investments are also illiquid. The tax reliefs are only available when the investments have been held for at least three years. But an investor should be expecting at least a five-year horizon and ideally more. There is a reason this is called ‘patient capital’.
However, for an investor with an appetite to high risk/high returns and the ability to lock away their investments for a few years, there are other reasons they are seeking out these investments:
- pension limits: significant decreases on annual pension contributions and a total pension pot cap, each capturing many more savers, have seen investors look elsewhere for tax efficient investments.
- buy-to-let: changes to stamp duty and council tax rates, a softening in the property market – and probably a realisation that buy-to-let involves some effort & pain – is making property less attractive.
- traditional equities: more investors are seeing that whilst mature businesses are lower risk, there are plenty of examples, like Carillion, of large entities losing all or much of their value. In today’s world, start-ups can quickly grow and are increasingly challengng established brands and companies.
- fun: – yes ‘fun’, and interest – backing a start-up and seeing it grow is a buzz. Whoever sat their child or grandchild on their knee to tell them about their pension pot? But seeing your product on the supermarket shelf for the first time or purchasing it as a gift creates stories to tell friends and family and an engaging way of introducing the investment world to the next generation.
EIS & SEIS funding is an important element of supporting innovation and growth in the UK. But it is also an under-appreciated asset class for investors. Please spread the word and we can support UK start-ups and create wealth for investors.
