Using the Enterprise Investment Scheme to diversify an investment portfolio

The Enterprise Investment Scheme (EIS) is a series of government-backed tax reliefs launched in 1994.

EIS was designed and launched to encourage private investors to invest in small and higher-risk businesses by offering some financial incentives to investors.

The benefits of EIS

The basic tax reliefs offered by the EIS are:

  • You can claim up to 30% income tax relief on investments up to £1 million per tax year
  • If shares are held for at least three years, and gains are free of Capital Gains Tax
  • If you dispose of shares at a loss you can offset the amount against income tax of the current or previous year
  • You can defer paying Capital Gains Tax when the gain is due to investing in an EIS qualifying company

Using EIS investing to diversify your investment portfolio

Not only are there benefits for EIS eligible companies and investors in that relationship. For investors, EIS investments give them the chance to diversify their investment portfolio.

The types of higher-risk companies seeking investment typically wouldn’t appear on an investor’s radar unless they’re looking for EIS opportunities.

They also present some potentially high returns as you’re investing in the early stages of a company. The tax relief is designed to help mitigate some of that risk, and it’s often incentive enough.

The returns are almost certainly going to be realised in a different cycle from traditional investments. Helping to diversify a portfolio and spread out the returns.

Entering new markets

Another benefit to seeking out EIS investing opportunities is the ability to enter new markets you wouldn’t have otherwise found through traditional investing.

The rules can be complex, but generally speaking, to be eligible for EIS a company must at least meet the following qualifications:

  • Must not have assets higher than £15 million in value
  • Must not be in certain industries, such as coal or steel production
  • Must not have 250 or more full-time employees
  • Must not be listed at the time of investment
  • Must not have received more than £12 million in funding to date

It’s also a requirement that all investment capital has to be actively engaged in the company within 24 months.

As you can see from the qualification requirements, the EIS scheme narrows down the market to smaller, emerging companies in need of capital to fuel their growth.

This often leads investors into new and emerging markets or trends. EIS opens up some interesting and exciting opportunities for investors willing to take on a little more risk.

Higher risk means higher reward

The EIS scheme was created to make investing in higher-risk, or at least less established businesses more attractive for investors.

EIS eligible companies are typically in the early stages of their business, so they’re largely unproven in terms of growth and financial track record.

You have to be realistic and consider that you may lose part or all of your investment. However, at the same time, you could see your equity stake grow exponentially.

For this reason, it’s up to you as the investor to do your due diligence and invest in companies you are comfortable doing so.

There are considerable tax benefits to investing in EIS companies, but only if you’re making smart investments that also pay off with a favourable return. Whatever you decide to do, the EIS scheme presents some interesting investment opportunities for investors looking to diversify their investment portfolios.

TIME BUSINESS NEWS

TBN Editor

Time Business News Editor Team