Eis

claire21

bowlhead99 wrote: »

I'd agree with Malthusian that the value of the EIS scheme will vary from individual to individual, with wealthier and higher taxable income people having more relative benefit.

- value of ability to take tax-free dividends is greater to someone with more wealth or dividend income who has already utilised their ISA or pension allowances or their annual dividend allowance ;

- value of ability to take tax-free dividends is greater if you are a higher rate taxpayer as your tax saving is at a higher rate per pound invested (32.5% or 38.1% saved instead of 7.5%) ;

- value of ability to take tax free capital gains is greater to someone with more wealth or gains who has already utilised their annual CGT exemption ;

- value of ability to take tax free capital gains is greater if you are a higher rate taxpayer as your tax saving is at a higher rate per pound invested (20% saved instead of 7.5%) ;

- value of ability to take tax income tax relief on losses is greater if you are a higher rate taxpayer as your tax saving is at a higher rate per pound lost (40% or 45% instead of 20%) ;

- value of ability to defer or save capital gains using deferral relief is more valuable if you (a) actually have some taxable gains that would exceed the allowance and can be deferred into a year that perhaps doesn't exceed the allowance and (b) you would be on a higher CGT rate if you had not been able to defer, e.g. being a 20% CGT payer instead of 10% CGT payer ;

- value of 30% initial income tax relief is only useful if you actually pay more income tax than the relief available, e.g. someone on £27500 salary making a few hundred pounds of pension contributions will not haven enough income tax to get as much as 30% income tax relief on £10000 of EIS investment because they don't have a £3000 tax bill. Whereas someone on twice that salary can probably do a £25000 EIS investment at full 30% tax relief because they probably pay more than £7500 income tax ;

- value of business property relief for inheritance tax is higher for estates of people with a higher level of wealth (ie where the assets would have been wholly or partially in scope of IHT due to estate exceeding the threshold).

From the above, the potential benefits of EIS scheme are not entirely restricted to people in the higher tax brackets, and people will perhaps cite the 30% initial relief as the main thing they are looking for. But the people with bigger incomes are perhaps more likely to have higher general levels of wealth and investments and more likely to be able to make use of a greater value from the other incentives, including being able to take a loss against income tax.

If you are willing to use EIS without being able to take up the full range and % rate of benefits which the government is willing to put on the table to incentivise your investment, your thinking isn't necessarily flawed, but the risk/reward tradeoff for the deal is not as good as it could be for other investors - the most basic reliefs may not be enough to tip the risk/reward of the investment into being worthwhile, vs using other mainstream investments inside or outside other tax wrappers.

Thanks for listing all the points , that makes it a lot easier to say.

I’m a high tax payer (self employed) with a big IHT issue

claire21

Am I correct in thinking Gousto, Graze and Pact Coffee were EIS ? Are there any other well know ones you’ve heard of ? Thanks

bowlhead99

claire21 wrote: »

Thanks for listing all the points , that makes it a lot easier to say.

I’m a high tax payer (self employed) with a big IHT issue

As a general rule, EIS/SEIS have potential benefits for someone who is at the stage of their life where they are happy to make somewhat more speculative and illiquid investments to grow their wealth over the long term, and the tax breaks will help them do that at a lower risk than if there had been no tax breaks.

If you're not particularly happy to make speculative illiquid investments in early-stage companies for half a decade or more, I don't know that a reduction of an IHT bill for your heirs should tip you over the edge into investing in that asset class. There are lower risk ways to do it - e.g. you could also have BPR on a portfolio of shares listed on the AIM market, which are more mature companies which have passed the hurdle of making it to raising capital on the financial markets and are publicly tradable, even if they are not large enough or developed enough to go for a main market listing.

If I received £100k of EIS investments as an inheritance, it would be £100k of investments which might have cost only £70k for the dead person to acquire. However, being a private company they would likely not be a ready market for the shares, so I couldn't do anything with them for several years, and if they went down in value (perhaps to zero) during those years, I wouldn't qualify to claim any income tax relief because I wasn't the original subscriber of the shares - only a secondary owner.

When you add those things to the fact that in order to die with £100k of private EIS investments the deceased might have originally purchased £500k of EIS investments and had 80% of them go bust in the first few years (perhaps even before the 2-year hold period to get BPR qualifying status has expired) it is clear that it's not some silver bullet to fix your inheritance tax woes in a single shot.

Investing in early-stage small private companies can certainly solve an inheritance tax problem but unfortunately the way it might most easily do that is by causing significant loss of wealth.

Sure, if you have £50k spare you could punt a couple of thousand quid into 25 different opportunities over the course of a few years if you could find those 25 credible opportunities. But if your idea is to find 10 things to invest £100k each into, after conducting adequate due diligence on each of them, that's probably fanciful if you don't have a few million of mainstream investments and vast experience of being a private equity investor or business angel.

You could look at EIS funds and managed portfolio services but they can be pretty high cost to get into, because (a) commercial due diligence is expensive and (b) the operators know you are only doing it to save stinking tax bills so you won't mind high charges for their discretionary management, even though you can still lose your shirt.

EIS portfolio schemes that aim to get the benefits from EIS tax breaks without the real risks of start-up equity investing, are likely to be at risk of having the breaks cancelled by HMRC leaving you more exposed than you were hoping to be. So, before committing any significant cash, ensure you have researched the hell out of everything. There are some decent firms who have exited the 'EIS portfolio' sub-sector of private equity/ VC nvesting and closed their programs to new retail investors (e.g. Octopus) because they have realised that other niches can offer more reliable or profitable returns - for them as a manager, ie correlated but not 1:1 with the returns of their clients - such as straight VC/PE investing for institutional clients, VCTs, private debt etc etc.

claire21

bowlhead99 wrote: »

As a general rule, EIS/SEIS have potential benefits for someone who is at the stage of their life where they are happy to make somewhat more speculative and illiquid investments to grow their wealth over the long term, and the tax breaks will help them do that at a lower risk than if there had been no tax breaks.

If you're not particularly happy to make speculative illiquid investments in early-stage companies for half a decade or more, I don't know that a reduction of an IHT bill for your heirs should tip you over the edge into investing in that asset class. There are lower risk ways to do it - e.g. you could also have BPR on a portfolio of shares listed on the AIM market, which are more mature companies which have passed the hurdle of making it to raising capital on the financial markets and are publicly tradable, even if they are not large enough or developed enough to go for a main market listing.

If I received £100k of EIS investments as an inheritance, it would be £100k of investments which might have cost only £70k for the dead person to acquire. However, being a private company they would likely not be a ready market for the shares, so I couldn't do anything with them for several years, and if they went down in value (perhaps to zero) during those years, I wouldn't qualify to claim any income tax relief because I wasn't the original subscriber of the shares - only a secondary owner.

When you add those things to the fact that in order to die with £100k of private EIS investments the deceased might have originally purchased £500k of EIS investments and had 80% of them go bust in the first few years (perhaps even before the 2-year hold period to get BPR qualifying status has expired) it is clear that it's not some silver bullet to fix your inheritance tax woes in a single shot.

Investing in early-stage small private companies can certainly solve an inheritance tax problem but unfortunately the way it might most easily do that is by causing significant loss of wealth.

Sure, if you have £50k spare you could punt a couple of thousand quid into 25 different opportunities over the course of a few years if you could find those 25 credible opportunities. But if your idea is to find 10 things to invest £100k each into, after conducting adequate due diligence on each of them, that's probably fanciful if you don't have a few million of mainstream investments and vast experience of being a private equity investor or business angel.

You could look at EIS funds and managed portfolio services but they can be pretty high cost to get into, because (a) commercial due diligence is expensive and (b) the operators know you are only doing it to save stinking tax bills so you won't mind high charges for their discretionary management, even though you can still lose your shirt.

EIS portfolio schemes that aim to get the benefits from EIS tax breaks without the real risks of start-up equity investing, are likely to be at risk of having the breaks cancelled by HMRC leaving you more exposed than you were hoping to be. So, before committing any significant cash, ensure you have researched the hell out of everything. There are some decent firms who have exited the 'EIS portfolio' sub-sector of private equity/ VC nvesting and closed their programs to new retail investors (e.g. Octopus) because they have realised that other niches can offer more reliable or profitable returns - for them as a manager, ie correlated but not 1:1 with the returns of their clients - such as straight VC/PE investing for institutional clients, VCTs, private debt etc etc.

I agree with all you are saying , but it’s just one tool for me to use as part of my planning. 38.5p in the pound would be my exposure

bowlhead99

claire21 wrote: »

Am I correct in thinking Gousto, Graze and Pact Coffee were EIS ? Are there any other well know ones you’ve heard of ? Thanks

Graze, which went from an indebted startup to a business with $70m annual revenues and was bought by Carlyle and then Unilever, had received a couple of million of venture funding at various stages including from Octopus's venture team (including Titan VCT) and Draper Esprit, about a decade earlier than Unilever's acquisition.

However, that and a large number of other 'little company made it" stories are not particularly relevant to you as a prospective investor in 2019/20, as it's no longer possible to invest in those particular early stage businesses at their early-stage prices.

Perhaps of more relevance is the EIS investments that you've *not* heard about, which lost 100% of their investors' money. Sure, 0p return from a 38.5p investment sounds better than 0p return from a 100p investment. As a percentage, it's a negative 100% return on capital.

claire21

bowlhead99 wrote: »

Graze, which went from an indebted startup to a business with $70m annual revenues and was bought by Carlyle and then Unilever, had received a couple of million of venture funding at various stages including from Octopus's venture team (including Titan VCT) and Draper Esprit, about a decade earlier than Unilever's acquisition.

However, that and a large number of other 'little company made it" stories are not particularly relevant to you as a prospective investor in 2019/20, as it's no longer possible to invest in those particular early stage businesses at their early-stage prices.

Perhaps of more relevance is the EIS investments that you've *not* heard about, which lost 100% of their investors' money.

I agree again that the majority will fail , however it could be rather fun if one makes it big 😃

bowlhead99

claire21 wrote: »

I agree again that the majority will fail , however it could be rather fun if one makes it big ��

Yes, you just need to buy 50 of them so that you get 33 complete dogs, ten major failures, five that can wash their own face, and two stars that more than make up for the others.

If you only invest in the first 48 of those, you might lose pretty much all of your money.

mostwelcome

bowlhead99 is of course being skeptical – which one should, although there are degrees.

I'd expect as many as half of my EIS investments made under current rules to fail (not all of which will return £0); some to return either side of £1 per £1 invested, and 1 or 2 in 10 to go big.

In answer to your Q about the companies, yes Gousto and Pact Coffee both EIS-backed. They were both invested in by a managed EIS fund, MMC Ventures.

Btw, MMC is a good fund to examine from a wins/losses point of view. They have had some good and recent exits (e.g. NewVoiceMedia, Sky Futures, Love Home Swap), along with a few disappointments (e.g. Tyres On The Drive which went into administration this year) and some exits that did OK (Breathing Buildings, Wool & the Gang).