Investing in EIS businesses

Paul_Dodd

Hi all,

I've recently signed up to Crowdcube and have placed a couple of investments, to a total of £4,500. One of them was in a business called Nova, who start startups, it looks really interesting and it's listed as 'EIS' qualifying.

From the reading I've done I understand that there are certain tax benefits I could be taking advantage of - I'm thinking of putting some more money into this business, but don't really understand the EIS implications.

Can anyone give me a layman guide to what this means, and if it's advisable for me to invest more money into Nova?

Floccinocci

EIS stands for Enterprise Investment Scheme. There are a number of qualifying criteria for a company to be classified as an EIS - which I won't go into here.

From a tax benefits perspective EIS's are great instruments:

- You get 30% of the investment value reduced from your income tax - but you need to hold them for a certain period of time. Obviously if the 30% is larger than your income tax liability this just goes to 0.
- CGT gains can be invested into an EIS which defers the CGT liability until the EIS is sold. If you manage the EIS unwind correctly and realise a gain each year in line with the CGT allowance, you can avoid paying CGT.
- EIS can be business relief investments, which means that after holding them for two years they are outside of your estate for IHT purposes.

The downside to an EIS is it is a risky investment so only suitable for people with the relevant experience and risk profile. It also ties your money up for a number of years if you wish to use the benefits.

steampowered

EIS tax relief is the main driver for a lot of these investments. If you aren't taking advantage of the tax relief you likely overpaid.

You will need to complete a tax return, or if you don't do tax returns send the appropriate form to the office that deals with your PAYE.

Malthusian

Remember not to let the tax tail wag the investment dog. Most companies on CrowdCrap fail (especially the interesting ones, if an investment is "interesting" it's usually in the Chinese sense) and even if you claim all possible reliefs against your loss - which is quite difficult, and requires you to be really rich - you are still worse off than if you'd kept your money in your pocket.

Albermarle

EIS and similar schemes like VCT's are best for relatively wealthy people who have maxed out all more mainstream tax free options eg pensions: ISA's : tax free national savings etc

ivormonee

I disagree. EIS is a type of wrapper, in much the same way as an ISA; it is not a type of investment. And it is not necessarily best for "wealthy" people - the EIS gives you certain tax reliefs so, as long as you are a taxpayer, you would benefit from this. But that is just a tax advantage. The reason for investing should still be the underlying investment - is it sound, based on your understanding and research? Investing means taking a risk on what you are investing in rather than doing it for the sake of any tax breaks.

A note on equity crowdfunding. Whilst it's a good idea in principle, albeit a relatively very high risk option, virtually all of the enterprises on crowdfunding platforms are way, way too over-valued. Furthermore, a lot of them are pure garbage. There are some good businesses on there too, but with valuations offered, the returns would not be quite as good as they should be to reward the investor for the inherent risks. They can be worth a punt but with moderate amounts and realistic expectations.

bostonerimus

My advice would be to stop investing in stuff you don’t understand. A crowd funded EIS company is bound to be risky and there are more appropriate ways to invest your hard earned money if you are not completely on top of all the issues and potential pitfalls.

Apodemus

Am I the only one cynical enough to smell a rat, when a first-time poster asks an “innocent” question about a named investment opportunity and another first-time poster comes straight back in with an explanation of the tax advantages?

Floccinocci’s response was actually very good, so I apologise if I am maligning them, but it just seems all too convenient!

msallen

Apodemus wrote: »

Am I the only one cynical enough ...

Not at all. If Nova have to market themselves this dishonestly then I wouldn't touch them with a bargepole.