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Industry Update | May 2023
Enterprise investment scheme
Spring Budget 2023: SMEs receive tax-friendly policies and investment incentives
Unlocking EIS opportunities all year-round: don’t wait until tax-year end
Why EIS is compelling right now
Thought leadership
Analysis
Thought Leadership
Welcoming the new tax year: maximising tax-efficient investments
MICAP statistical analysis: EIS open offers
Breaking the glass ceiling: the rise of female entrepreneurship
Consumer Duty: Considering ESG/Sustainability in EIS
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Photography by Interview by
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A new year brings new opportunities, and advisers will be commencing conversations with clients to discuss the resets that come with pension schemes and ISAs. Alongside this, it’s worth discussing how investors can utilise EIS as a tax-planning opportunity to mitigate some of the tax changes that have recently been implemented. In this issue, we discuss March’s Spring Budget and the measures implemented to boost the SME sector in Spring Budget 2023: SMEs receive tax-friendly policies and investment incentives. In Unlocking EIS opportunities all year round: don’t wait until tax-year end, one manager makes a case for investors to think about EIS earlier in the tax year to mitigate against the potential risk of missing out on open EIS offers. Earlier this year, the Rose Review released their report looking into the recent drive behind female-founded businesses. In Breaking the glass ceiling: the rise of female entrepreneurship, this compelling thought leadership piece analyses the role that EIS has to play in breaking down barriers. In Why EIS is compelling right now, one provider takes a deep dive into why the UK start-up market has gone from strength to strength over the last decade. We probe the latest data provided from MICAP looking at all the open EIS offerings across the marketplace in MICAP statistical analysis: EIS open offers. Welcoming the new tax year: maximising tax-efficient investments takes a look at some of the specific tax changes that have recently taken place and how EIS can be a worthwhile tax-planning tool for mitigating some of the impact. Consumer Duty is still the talk on everyone’s lips and ESG could be an area of discussion with clients that still need further education. In Consumer Duty: Considering ESG/Sustainability, one thought leader makes a case for building ESG into exisitng advice frameworks so that investors can make more informed decisions.
Introduction
Market Update
Considerations for Investment
Industry Analysis
Managers in Focus
What's on the Horizon
Further Learning
The EIS universe today
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This industry update of the Enterprise Investment Scheme (EIS) comes at a pivotal time as we enter into the 2023/24 tax year. The changes that were announced in the Spring Budget are now in full effect and it couldn’t be a more pertinent time for investors to think about maximising their tax-planning opportunities for the year ahead.
learning objectives
Identify the main developments and news in the EIS market Outline regulatory developments that could impact the EIS in the near future Evaluate the key fees and charges applied by EIS managers Describe some of the practical mechanisms used by EIS investment managers to deliver specific objectives to clients Define some of the key events likely to impect EIS in the near future Analyse some sectors and strategies that successful EIS managers are leveraging
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Learning objectives for CPD accreditation
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Ushering in the new 2023/24 tax year
The EIS Universe today Spring Budget 2023: SMEs receive tax-friendly policies and investment incentives Unlocking EIS opportunities all year-round: don’t wait until tax-year end Breaking the glass ceiling: the rise of female entrepreneurship Why EIS is compelling right now MICAP statistical analysis: EIS open offers Welcoming the new tax year: maximising tax-efficient investments Consumer Duty: Considering ESG/Sustainability in EIS Continuing Professional Development About Intelligent Partnership
name surname
ecently (on 15th March), the Chancellor unveiled a Spring Budget which focused on targeted measures rather than grand overhauls or unexpected announcements. While it produced no major surprises, the statement did contain some crucial messages for both small businesses and investors. Primarily focused on the UK's post-pandemic economic recovery, the financial plan delivered in particular several measures that will impact investors in the Enterprise Investment Scheme (EIS).
- Van Hoang, Investment manager, Blackfinch Investments
The clearer market environment post-Brexit, as well as a tighter grip on the pandemic, creates an outlook conducive to increased listings on AIM.
Opening Statement Update Overview
1. INTRODUCTION
Market Composition Fees and Charges
3. Considerations For Investment
Are Hostile Takeovers A Danger To AIM? AIM In FCA’s Proposals
4. Industry Analysis
What Has The Market Been Doing? More AIM Positivity 2021 AIM Listing What's Driving the Market? The Autumn Budget 'AIM' for success, not perfection Focus Drives Pandemic Return Small is Beautiful Combatting Climate Change Health is Wealth What the Managers Say
2. market update
Amati Global Blackfinch Blankstone Sington Close Brothers Hawksmoor investment Puma investments Sarasin & Partners Stellar investment TIME investments Unicorn Comparison Table
5. managers in focus
More AIM-focused EIS Future Market Changes Considered What The Managers Say
6. what's on the horizon
Learning Objectives CPD and Feedback About Intelligent Partnership Disclamer
7. further learning
Spring Budget: SMEs receive tax-friendly policies and investment incentives
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BIDDER JURISDICTION (FIRM OFFERS)
Jeremy Hunt announced his intention to expand EIS and provide further details in due course, allowing more investors to access tax-efficient investment opportunities in SMEs. The modifications to the Seed Enterprise Investment Scheme (SEIS) announced previously have now come into effect for the 2023/24 tax year. The Chancellor also intends to give pension funds greater exposure to venture capital, potentially enabling more investors to access tax benefits offered by their pensions.
role, Intelligent Partnership
Smaller stakes have little choice
Unfortunately, individual retail investors are unlikely to hold a large enough stake to change the outcome of these votes. But, on the other hand, in the vast majority of takeovers seen in the first half of 2021, there was a substantial bid premium where the share price increased during the offer period. The highest was an eye-watering 79%, although more commonly, it was in the lower, but still very pleasing 20% - 50% range.
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Expanding tax-efficient investment opportunities for SMEs: EIS, SEIS, and pension funds
The UK currently boasts the most competitive overall corporate tax rate of all G7 economies, even with the upcoming six-percentage-point increase from 19% to 25%. On top of that, the government has introduced policies to encourage investment in SMEs, such as an increase in the annual investment allowance for small businesses to £1 million, allowing businesses to deduct the full value of their investments from taxable profits for this year.
Implementing tax-friendly policies
The UK has placed an emphasis on artificial intelligence (AI) and sustainability, particularly environmental sustainability. The government aims to reclassify nuclear energy as an environmentally sustainable industry, entitling it to the same benefits as solar and wind energy industries. These updates could encourage technological and impact investors to invest in these areas. This proposal and the R&D measures mentioned above are likely to benefit knowledge intensive companies (KICs), which raise money for research, development or innovation. These are businesses that are carrying out research, development or innovation at the time that they are issuing shares. Such companies are given a unique status under EIS, which enables them to raise a more flexible and larger amount of EIS investment compared to non-KIC companies.
Focusing on technology and clean energy
intelligent-partnership.com
Mohamed Dabo
Senior Editor, Intelligent Partnership
The UK has placed an emphasis on artificial intelligence (AI) and sustainability, particularly environmental sustainability.
Starting from April 1 2023, a "full expensing" regime will be implemented for the next three years. This regime allows businesses to deduct 100% of the cost of certain plant and machinery from their profits before tax.
Setting up a "full expensing" regime
To encourage innovation in all sectors, the government has announced additional support for high-R&D SMEs through increased tax relief for companies that are not yet profitable. This will allow companies to claim about £27 for every £100 spent on R&D.
Increasing tax relief for high-R&D SMEs
The modifications to the Seed Enterprise Investment Scheme (SEIS) announced previously have now come into effect for the 2023/24 tax year.
Investment zones are the government’s new proposal to set up knowledge-intensive clusters to drive economic growth. There will be 12 new investment zones across the country, with each receiving £80 million over the next five years and a number of tax incentives to promote investment. The government aims to work with local partners in each location by the end of 2023 to focus on research institutions such as universities and stimulate growth in technology, creative industries, life sciences, advanced manufacturing, and the green sector. It is a safe bet that EIS, which is arguable the UK’s most successful government-backed venture capital scheme, will be an essential component of this ambitious project.
Launching regional investment zones
The changes proposed in last year's Autumn Statement will continue as planned in the new tax year. Changes to consider when planning investments in 2023/24 include a reduction of the additional rate income tax threshold from £150,000 to £125,140 and the reduction of the capital gains tax (CGT) exemption from £12,300 to £6,000, then to £3,000 in the 2024/25 tax year. The government aims to reduce the dividend tax by half to £1,000 from April 2023, then to £500 in April 2024, representing a 90% reduction in the allowance over just six years.
Sticking to fiscal change commitments
These changes are designed to increase support for businesses in their early stages and could contribute to reducing the investment failure risk for venture capital investors. It is important for UK investors to take advantage of EIS and the other tax-efficient investment schemes, particularly in light of the fiscal changes announced by the government.
Reducing investment risk and increasing support for early-stage businesses
By Mohamed Dabo, Senior Editor, Intelligent Partnership
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he build up to tax-year end can often see a deluge of EIS applications coming in thick and fast to managers in the space, often when tax-planning is at the forefront of a client’s mind. This can result in a race against the clock to get funds deployed and shares allocated, making it possible for investors to claw back some of their January tax bill. This urgency surrounding timely deployments can sometimes see investors miss out when there is limited capacity for products. With this in mind, there’s a prudent case to be made for investors to think about EIS earlier in the year and mitigate such risk. With an abundance of market offerings, investors are able to enjoy the added benefit of being more selective in their choice of EIS investment based on their own personal interests and goals. Here at Oxford Capital, our investment strategy, paired with a strong deal pipeline, proves that opportunities lie all year round. In this article, we explore why investors shouldn’t solely wait until the end of the tax season to consider EIS as an investment option.
By Sarah Wakefield, Business Development Manager, Oxford Capital
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As a general rule of thumb for early-stage companies, funding cycles should roughly last between 12-18 months to allow a company to hit the KPIs and forecasts set out during the fundraising process whilst pitching to investors. Of course, the start-up nature of these companies often means that even the best laid plans can quickly change, and cash burn rate may unexpectedly accelerate or decelerate. It is therefore not unusual for fund managers to see deal flow peaking at different stages of the year, and not just tax-year end. Whilst Q1 is undeniably a hive of investor activity, with March in particular usually seeing a spike in closed rounds, other standout peak periods can be witnessed periodically throughout the year. For example, May, June and September are quite popular months with investee companies keen to close rounds either side of the summer months and people taking time away from the office. Similarly, December can also see spikes in fundraising activities with businesses eager to tie up their finances ahead of the Christmas break and the new year.
Seasonality Fundraising
At Oxford Capital, our evergreen investment strategy is designed to ensure that we invest throughout the year, allowing us to select the best companies based on our criteria as opposed to a tranche based approach.
It is worth remembering that a consistent deal pipeline means that there is no shortage of decent investment opportunities throughout the year and can provide excellent portfolio diversification. Investors would therefore be wise to capitalise on opportunities as and when they arrive rather than waiting for the mad scramble of tax-year end, where you could risk rounds being oversubscribed and missing out on the EIS benefits altogether.
For some investors, tax planning will begin right at the start of the new tax year with conversations usually circling in on pension and ISA contributions. Why not also add EIS into that conversation early-on? Investing into EIS earlier in the year could see some deployments into investee companies occur quickly, and in some cases, investors could receive their EIS3 certificates ahead of their January tax return submissions. This allows investors to claim income tax relief or CGT deferral relief as soon as they receive their certificates. The Oxford Capital Growth EIS aims to diversify each subscription across multiple portfolio companies and fully invest funds over 12-18 months. This includes new investments and companies that the team has backed in the past. Over the last tax year, we invested in seven companies in sectors such as digital health, AI and machine learning, legal tech and insurtech.
Planning opportunities all year round
There is no denying that the 5th of April serves as an important mark in the sand for advisers and investors alike to get their tax planning ducks in a row. However, as highlighted in this article, there is value to be found by removing some of the stress that comes with this deadline by considering EIS earlier in the year.
The early bird catches the worm
oxcp.com swakefield@oxcp.com
Sarah Wakefield
Business Development Manager, Oxford Capital
2021 AIM LISTINGS
It is worth noting that much of the strong performance of the overall AIM market in recent years can be attributed to a relatively small number of the larger companies.
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Earlier this year, the Rose Review (the government backed review led by NatWest CEO Alison Rose) released their latest report on Female Entrepreneurship. They found that in 2022 more than 150,000 new businesses were started by women – more than ever before in the UK.
his is exciting news, particularly when you consider that £250 billion could be added to the UK economy if women started and scaled businesses at the same rate as men. At such an economically challenging time, it shows the potential that entrepreneurs and those investing in early-stage businesses have to unlock economic growth in the UK. The Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) are world leading schemes that have played a vital role in ensuring the UK is one of the best places to start a business. Since their inception, SEIS and EIS have together raised more than £27 billion and have enabled investment in 52,000 start-ups. That is a phenomenal achievement, and when you couple that with the jobs created, the innovation and the economic growth, you really start to get a sense of just how important these schemes are. The schemes have been so successful at attracting investment into exciting, high risk start-ups that a number of foreign governments have tried to emulate the schemes and, just last month, the EISA was invited to the French Embassy to discuss the importance of the EIS to the UK ecosystem. Through a number of tax reliefs, these government schemes encourage investment into start ups at the start of their journey and many of the UK’s most successful household names say they don’t think they would exist today without that crucial investment that the schemes helped them secure right at the beginning. Furthermore, many of these start-ups are finding solutions to some of the biggest challenges that we’re currently facing and are genuinely changing the world.
The beginning of the new tax year is welcoming some significant extensions to the SEIS including an increase in the amount a start-up can raise under the scheme from £150,000 to £250,000. Alongside this, you’ll be able to invest up to £200,000 per year through the scheme (up from £100,000) and, crucially for female entrepreneurs, you’ll be able to raise investment through the scheme in your first three years of business, rather than two years. Evidence suggests that women are less likely to have existing investment networks and less likely to be aware of the schemes. The extension of the age limit should allow more women across the whole of the UK to benefit from investment through the scheme.
eisa.org.uk christiana@eisa.org.uk
Christiana Stewart-Lockhart
Director General EIS Association
Changes to SEIS limits
The statistics
It is not only on the founder side that women are less likely to have heard of the EIS and SEIS, but potential female investors are also less likely to have heard of the schemes. The UK Business Angels Association (UKBAA) found that 96% of women had never heard of angel investing as an investment option and only 14% of Angels in the UK are women. Even amongst our MPs, only 57% have heard of the schemes. Things are starting to change and whilst money has traditionally been a taboo topic of conversation, the proliferation of online forums and blogs in recent years have helped to normalise talking about money and financial planning. This has helped open the world of investing to new audiences and, in particular, more women. There have been a number of start-ups (several of them SEIS and EIS investee companies) that are also encouraging women to take a greater interest in their finances and investing. Finally, whilst unlikely to have an impact in the immediate term, more financial education is being introduced in schools with charities like RedStart transforming the life chances of children across the UK. According to the FCA, just 16% of regulated financial advisers are women. However, that number doubles to 30% when you look at advisers under the age of 45. The Rose Review found that the biggest leap in the 2022 data was amongst 16-25 year olds which saw the number of female founders rise by 24.3%. Things certainly seem to be shifting amongst the younger generations and alongside this, women now control a greater share of the UK’s wealth than ever before, with more than 60% of the UK’s assets predicted to be in female hands by 2025.
The future is female
One core ambition of the Rose Review is to grow the number of women investors in the UK and there are a number of industry initiatives through which this is being done, including the Women backing Women campaign. The EISA has also done a tremendous amount of work in this area and last year we hosted six free Ready Steady Grow events to raise awareness of the schemes amongst founders, advisers and investors. This Autumn, we’ll be organising 10 of these events across the regions and devolved nations to try and ensure every female founder and investor is aware of the opportunities the SEIS and EIS offer them. In this exciting new era of female entrepreneurship, I wanted to pay tribute to the fantastic progress that is being made in this area. Whilst more could always be done, for the most part it is a very positive story when you consider that more women are starting businesses than ever before. There is clear evidence to show that young companies are where you can find the greatest opportunity for growth and the SEIS and EIS facilitate the lifeblood of investment into these early stage start ups. Ensuring all women are aware of the schemes and providing education on the opportunities they offer both founders and investors is core to the EISA’s work. With the changes to the SEIS limits now in motion, it is an incredibly exciting time for women and there is much to be celebrated.
One core ambition of the Rose Review is to grow the number of women investors in the UK.
By Christiana Stewart-Lockhart, Director General, EIS Association
MORE AIM POSITIVITY
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ver the past decade, the number of investors looking to back startups has been steadily growing. The number of announced equity deals via crowdfunding platforms grew from just eight deals in 2011 to 573 deals in 2021. It seems growing numbers want to back companies in their formative years, to play a part in helping them grow, and to take on more risk with a portion of their wealth to reach for higher returns. Accordingly, the advised market has seen plenty of interest from clients who want to diversify their portfolio and target high growth by backing new ventures. At the same time, the current outlook for investing in venture capital is particularly exciting.
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This might surprise you but, just like diamonds, billion-dollar companies (or ‘unicorns’) are renowned for taking shape under pressure. For example, some of the most successful VC-backed businesses, like Airbnb, Zoopla, and Uber, were formed in the wake of the 2008 global financial crisis. As the global economy once again faces fresh challenges, we’re seeing many of the same trends appearing which helped to create these unicorns: existing businesses are spending less on innovation, there’s a growing pool of available talent due to company layoffs, and there’s less competition to invest in the best entrepreneurs. While slowing global growth can be tough on any business, if you look closely, there are some opportunities to unearth tomorrow’s success stories. In this environment, managed portfolios of EIS investments have come into their own.
An EIS portfolio will typically offer a more unfettered return as the portfolio is much more concentrated, both in size and stage of company journey.
octopusinvestments.com support@octopusinvestments.com
Jessica Franks
Head of Investment Products Octopus Investments
The best time to invest in a decade?
Backing companies from day one to success or failure, EIS is an established route that facilitates investment into early-stage companies while providing for tax relief to mitigate some of the risks involved. They support investment directly into the shares of one or more qualifying companies near the start of their growth journey. Investors must be patient for potential returns. The investment is illiquid and exits should be expected only once each company has had time to significantly develop and attract a purchaser. Many investors therefore choose to pursue EIS with a manager who will pick out a portfolio of qualifying investments for them. Ultimately, this means that EIS is all about investing in a portfolio of companies with significant growth potential. This is a different investment to a Venture Capital Trust (VCT), another tax-efficient investment that invests in early-stage companies. This functions more like a fund – it will already be invested across a large portfolio of early stage and maturing companies, with more being added each year and successful maturing business being sold. VCTs typically pay out growth as a dividend each year rather than allowing growth to accumulate, and investors can sell VCT shares back to the VCT or in the secondary market, subject to liquidity, after the minimum five-year holding period has been met. An EIS portfolio will typically offer a more unfettered return as the portfolio is much more concentrated, both in size and stage of company journey. So, while a client will feel the failures more sharply, the successes will feel more pronounced. On the other hand, a VCT offers a blended return that nets losses against successes within the VCT itself. And it’s worth noting that the shares of unquoted companies can fall or rise in value more sharply than shares listed on the main market of the London Stock Exchange. They may also be harder to sell. This is why the tax reliefs available are important.
Backing companies from day one to success or failure
Clients can claim 30% income tax relief on the amount they invest in EIS-qualifying companies. They can claim relief against income tax due for the tax year they invest into each company, or they can choose to carry back relief to the previous tax year. When an EIS company is sold from an investor’s portfolio, any growth in value is 100% tax-free. This is especially valuable, because early-stage companies have the potential to grow significantly. Since there is an opportunity for high growth, EIS-qualifying companies also have a high risk of falling in value, including to nil, meaning investors may not get back the full amount invested. Loss relief can reduce the impact of companies that fall in value. Investors can claim relief on their “net loss” – the amount of money invested in the company that has lost value after the benefit of income tax relief has been taken into account. This loss can be offset against capital gains or income tax.
How EIS tax reliefs work
Importantly, because EIS reliefs are based on investments in individual companies, loss relief is available on companies that have failed, even if an investor holds a portfolio that has delivered a positive return overall. An equivalent is not available for VCT investors, where losses and gains made on portfolio companies offset within the VCT itself, producing a net return. Combined with tax-free growth and income tax relief, this is a very beneficial suite of reliefs for investors looking to target high growth from early-stage companies. While not relevant to everyone, some EIS investors also choose to make use of capital gains tax deferral. When a client has realised a gain elsewhere and invests the gain in one or more EIS-qualifying companies within a certain window of time, capital gains tax can be deferred until those companies are sold. EIS shares also qualify for relief from inheritance tax. If a client passes away while holding shares, provided they have held them for at least two years, they can be left to beneficiaries free from inheritance tax. If a gain was deferred when an EIS investment was made, that liability is also wiped out on death of the investor. It’s important to remember that tax reliefs depend on portfolio companies maintaining their EIS-qualifying status. The same is true of VCTs, which must maintain their respective qualifying status. Tax treatment depends on individual circumstances and may be subject to change in the future. Please remember that EIS and VCT investments are by their nature high risk. The value of an investment and any income from it, can fall as well as rise. Investors may not get back the full amount they invest.
By Jessica Franks, Head of Investment Products, Octopus Investments
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https://www.beauhurst.com/blog/uk-equity-crowdfunding/
Issued by Octopus Investments Limited, which is authorised and regulated by the Financial Conduct Authority. Registered office: 33 Holborn, London, EC1N 2HT. Registered in England and Wales No. 03942880. Issued: April 2023. CAM012971.
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MICAP statistical analysis: open EIS offers
For this section, we rely on MICAP data to help give you a snapshot of the size of the market, as well as the fees and charges you can expect to see from EIS offers. All data is accurate as of 25 April 2023.
A turbulent macroeconomic backdrop has continued to drive the direction of financial assets over the past year or so. Factors such as inflation, central bank policy and continuing geopolitical tensions have painted a very stark picture of the current financial state of the UK and across the world. The cost of living crisis also continues to dominate headlines with the annual rate of inflation reaching a peak of 11.1% in October 2022, a 41-year high, before easing in subsequent months. This stood at 10.1% in March 2023, the seventh successive month of double-digit inflation, according to findings in a recent UK Parliament commissioned research briefing. However, other markets have shown signs of resilience and the beginning of 2023 witnessed a rally across equity markets. For example, London’s FTSE 100 rose 3.1% in April and on the other side of the pond soaring mega-tech stocks continue to push the US index higher. From an EIS context, the start of the new tax year in the UK and the recent tax changes which are now in effect are expected to positively influence the outlook of the market over 2023, with more investors anticipated to turn to tax-efficient investing. Along with renewed commitment from the government to continue support for the scheme, as well as VCTs, the overall landscape sparks investor optimism. According to recent MICAP data, there are 52 funds currently open proving that there are no shortage of open offers available to investors who would like to get ahead of their tax-planning at the beginning of this new 2023/24 tax year. In this article, we will take a deeper dive into some of the key stats that are driving the marketplace.
Q1 markets snapshot
Sector Distribution
Investment into technology as a single sector has continued to command EIS investment trends and is entirely reflective of the explosiveness of the industry over the last decade. 2021 proved to be a record year for UK VC investment into technology start-ups and scale-ups. 2022, however, did not sustain these levels of investments but overall remained above pre-pandemic levels of $30.8bn, according to the most recent Tech Nation 2023 report. The UK tech ecosystem as a whole continues to demonstrate resilience as an asset class and encouraging statistics such as future unicorn numbers (companies that reach the £1bn valuation mark) have risen in the last couple of years. In addition, investing in general enterprise continues to be a preferred strategy for EIS managers to allow for maximum diversification across portfolios.
Since our last MICAP data anaylsis, there has been some deviations to the average fee structure across the EIS marketplace.
Investee companies
The open offers invest in early-stage companies (80%), later-stage companies (10%), and AIM-listed companies (10%). Whilst early-stage investing in very young businesses does come with inherent risk, this can be offset not only by the tax-advantages offered by the enterprise investment scheme, but also by the potential for significant growth when investing at such an early point in a company’s lifecycle.
Minimum subscription
The minimum subscription average across funds for investors is around £20,000 and EIS managers on average are looking at a minimum fundraise of £1.4m across the open offers.
Market composition of open offers by investment sector
General enterprise
Media & entertainment
Pharma & Biotechnology
Technology
AIM listed
Later stage
Early stage
Market composition of open offers by investee company type
Fees and charges
Since our last MICAP data EIS market analysis in February 2023, there has been some deviations to the average fee structure across the marketplace, as demonstrated in the table. In keeping with the rest of the market, the initial charge for investors has risen, to reflect the need for product and service providers to raise prices in light of a high inflation rate environment. Interestingly, fees paid directly by investee companies have risen from February 2023 suggesting that confidence in the growth trajectory of SMEs is returning following post-pandemic difficulties. This had been previously slashed to help businesses conserve costs and support cash flow where needed.
Average
£20,192
Mode
£25,000
Min
£5000
Median
£20,000
Max
£100,000
Initial Charge to Investors Excluding Adviser Fee Initial Charge to Investee Company Total Initial Charge AMC Charged to Investor AMC Charged to Investee Company AMC Annual Per Fee Exit Per Fee Initial Deal Fee Exit Deal Fee
Apr 2023
Feb 2023
1.71% 2.20% 3.75% 0.93% 0.82% 1.69% 0.00% 18.58% 0.30% 0.11%
1.60% 2.14% 3.68% 1.03% 0.73% 1.74% 0.00% 18.63% 0.28% 0.13%
By Francesca Eastwood, Programmes Director, Intelligent Partnership
intelligent-partnership.com francesca@intelligent-partnership.com
Francesca Eastwood
Programmes Director Intelligent Partnership
46.2%
7.7%
44.6%
1.5%
10%
80%
Neil Blankstone
Building an AIM portfolio is about building for the long-term, with ‘time in the market’ as important as any other exchange.
s we welcome in the new 2023/24 tax year, many of the new tax changes announced in the Spring Budget have now fully come into effect. It is now an excellent time for investors to carefully consider how they can maximise their tax-efficiency and should look towards schemes such as the Enterprise Investment Scheme (EIS) to utilise all the generous tax benefits that are on offer. In this piece, we will take a look at some of the specific changes that have recently come into force and how investors can mitigate some of the impact.
contact
blankstoneSington.co.uk 0151 236 8200 Enquiries@BlankstoneSington.co.uk Micap offer
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Inevitably, prompted by the FCA’s new labelling regime, as investors demand greater transparency and reporting, it will expose those fund managers whose ESG claims have been somewhat greater than their actions!
Get in touch
closebrothersam.com/ifa 01606 810325 ifaclient@closebrothers.com Micap offer
Introduced by the UK government in 1994, the scheme was designed to encourage private investment into early-stage, high-growth businesses whilst offering investors generous tax-breaks to provide downside protection against the inherent risks associated with seed investing. Since inception, the EIS scheme has been pivotal in fuelling the growth of British start-up businesses and EIS-qualifying companies today can vary across a wide range of sectors and industries. In HMRC’s most recent 2022 national statistics report looking at EIS, findings showed that 3,755 companies raised a total of £1.6 billion of funds under the scheme across 2020-21, underscoring the prominence of the scheme in the wider VC landscape.
"We ensure all our investments are sustainable and have positive environmental impact, and we are pleased that the rest of the investment community are following this trend" says another EIS manager.
Nick Priest
Partner Downing
www.downing.co.uk nickp@downing.co.uk
By Nick Priest, Partner, Downing
EIS: brief overview
Up tp 30% income tax relief Capital gains deferral Tax-free growth Inheritance Tax (IHT) relief Loss relief available on company failures
The tax breaks explained
Please note: tax treatment depends on individual circumstances and may change in the future. Tax-reliefs depend on the investee companies mantaining EIS-qualifying status.
Tax changes that have come into effect and the impact on EIS
Increases to income tax for higher-earners
The previous threshold at which high-earners started paying the top income tax rate of 45% was £150,000. As of April 6th, this has now dropped to £125,140 meaning more taxpayers will become liable to paying the higher tax bracket.
Personal allowance and income tax thresholds frozen until 2028
The personal allowance, currently set at £12,570, will remain unchanged and frozen until 2028, along with the income tax thresholds. Factors such as wage inflation paired with frozen thresholds will also result in more taxable income, and further push certain earners into the higher tax bracket. Reducing your income tax bill with EIS: Investors can claim up to 30% income tax relief on EIS-qualifying investments. Investors are able to invest up to £2 million (if including knowledge intensive EIS) per year. Opportunity for income tax carry back: When investing in EIS, investors have the option to carry back on EIS-eligible opportunities to claim tax relief on income tax paid in the previous financial year.
Tax-free allowance halved for Capital Gains Tax (CGT)
As of this month, the annual allowance for tax-free capital gains has been reduced from £12,300 to £6,000. A further cut has been planned to bring this down further to £3,000 from April 2024. Deferring CGT with EIS: If you have a CGT bill coming up, the EIS scheme allows investors to defer a payment of CGT that has arisen from the sale of an asset (providing the gain, or part of a gain, is invested into EIS-eligible shares). The tax should only become payable when investors realise the EIS investment, unless it is rolled over into another EIS investment. Deferred gains can be realised up to one year before and three years after the EIS investment date. Tax free growth with EIS: Providing that shares are held in an EIS-qualifying company for a minimum of three years, no CGT is payable on any profits at the point of disposal.
In addition, there are a number of other tax benefits afforded under the EIS. This includes 100% of an EIS investment qualifying for IHT relief providing shares are held for at least two years and at death. Furthermore, if an EIS-qualifying company fails, with a loss made on investment, investors may be able to claim up to 45% loss relief against income tax. Alternatively, this can be claimed against capital gains tax if EIS shares are disposed of at a loss. Given the abundance of tax benefits on offer, investors would be wise to research the market thoroughly and find a suitable provider. The Downing Healthcare Impact EIS is currently open for investment which gives investors the opportunity to invest in some of the UK’s most exciting early-stage healthcare and life sciences companies and at the same time, make a positive impact on society. Through their experienced team led by Nigel Pitchford, who has had a 25-year career in healthcare ventures investing. Downing’s healthcare ventures partners and their network have formed deep connections with the global venture capital community, which helps them to identify compelling investment opportunities and partner with leading financial and strategic investors.
For more information on Downing Healthcare Impact EIS please visit: Downing Healthcare Impact Fund | Downing LLP or contact: sales@downing.co.uk
roblems arise where processes do not reflect the regulatory direction of travel. If the regulatory train is heading one way, advice firms do well to stay on the train rather than get off and start walking in a different direction. One good example of ‘walking in a different direction’ is the way firms deal with advice on ESG/Sustainability. We’ve identified many different approaches, ranging from (sticking to the transport analogy) sitting next to the track, watching the regulatory train leave and waiting for the retirement bus to come along, to firms that are at the front of the train and trying to get into the driver’s seat. Most firms, of course, sit somewhere between these two extremes. To be on the regulatory train at all, the FCA has repeatedly confirmed that assessing each client’s preference, or not, for ESG/Sustainability is an absolute requirement. An advice process that doesn’t include ESG/Sustainability is equivalent to boarding the train without a ticket; you might get all the way to your destination, or you might find yourself with a fine or exiting at the next station. So, what is the best ESG/Sustainable advice process? That’s the wrong question because it implies something separate or ‘other’ to the way ESG/Sustainability is handled. The correct question is “how do I build ESG/Sustainability into my existing process?” Under Consumer Duty, good client outcomes are based on clients making informed decisions. A good advice process needs to build in some client education (no, not up to Level 4) in areas where they may not have enough information to make informed decisions. ESG/Sustainability is a good example of this. Some firms only discuss ESG/Sustainability if the client mentions it. The flaw here is it assumes clients know about ESG/ Sustainability/ values-based investment and have decided they don’t want it. Even if true, CD requires firms to show how they confirmed this to be true and to build this into the Suitability Letter. The best approach is to ensure clients understand the spectrum of capital, which ranges from conventional investment that does not include any ESG/Sustainability, through Conventional Funds with ESG as a risk tool, the forthcoming Sustainable Labels and finally on to ethical investment. According to FCA research, clients feel able to make better decisions if they can see how ESG/Sustainability sits as part of the spectrum, rather than treated as ‘other’. ESG Accord offers a CD and SDR-friendly suitability framework covering the full spectrum of capital that can easily be incorporated into a firm’s existing processes. It is easy for both clients and advisers to use and, importantly, will shortly be free to access via a new web site – Accord Initiative. You can pre-register your interest and as soon as the site is launched we will let you know, giving you access to the free framework and all the other tools available on the site.
Consumer Duty: considering ESG/Sustainability
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esgaccord.co.uk lee@esgaccord.co.uk
Lee Coates OBE
Director
Consumer Duty (CD) is designed to ensure that the advice process delivers good customer outcomes. In a non-prescriptive regulatory environment, what good actually looks like is down to the processes at individual firms.
ESG Accord
For a suitability framework to be fit for purpose, it's important that regulations are taken into account (Consumer Duty, PROD, COBS, SDR) so advisers can provide compliant advice that meets the needs and preferences of their clients.
Elly Dowding, ESG Accord
By Lee Coates OBE, Director, ESG Accord
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This publication contains general information only and the contributors are not, by means of this publication, rendering accounting, business, financial, investment, legal, tax or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Neither the contributors, their firms, affiliates nor related entities shall be responsible for any loss sustained by any person who relies on this publication. The views and opinions expressed are solely those of the authors and need not reflect those of their employing institutions. Although every reasonable effort has been made to ensure the accuracy of this publication, the publisher accepts no responsibility for any errors or omissions within or for any expense or other loss alleged to have arisen in any way in connection with this publication.It is not an offer to sell, or a solicitation of an offer to buy, the instruments described in this document. We recommend that prospective investors consult their own suitably qualified professional advisers concerning the possible tax consequences of purchasing, holding, selling or otherwise disposing of any of the investment options in this publication. .This publication is based on the authors’ understanding of the structure of the arrangements detailed, the current tax legislation and HM Revenue & Customs practice as at March 2023 which could change in the future. Intelligent Partnership is not authorised and regulated by the Financial Conduct Authority and does not give advice, information or promote itself to individual retail investors. It is the responsibility of readers to satisfy themselves as to whether any arrangement contemplated is suitable for recommendation to their clients. Tax treatment depends on an investor’s individual circumstances and may be subject to change. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors. This publication is not included in the CLA Licence so you must not copy any portion of it without the permission of the publisher. All rights reserved.
Outline regulatory developments that could impact the EIS in the near future
Identify main developments and news in the EIS market
Describe some of the practical mechanisms used by EIS investment managers to deliver specific objectives to clients
Define some of the key events likely to impact EIS in the near future
Evaluate the key fees and charges applied by EIS managers
Disclaimer
To find the content relevant to each of the learning objectives, simply check the top right of each article where there is a colour bar corresponding to the learning objective(s) it relates to. Each learning objective is assigned it's own colour in the left hand column below.
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Focus on quality drives pandemic returns SEIS expanded to support Government’s focus on innovation and entrepreneurs Are hostile takeovers a danger to AIM investors and UK PLC? Focus on quality drives pandemic returns SEIS expanded to support Government’s focus on innovation and entrepreneurs Are hostile takeovers a danger to AIM investors and UK PLC?
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Analyse some sectors and strategies that successful EIS managers are leveraging
The EIS universe today Consumer Duty: What it could mean for EIS investments EIS: The smart money goes north Find the gems: The art of identifying and investing in resillient businesses Three need-to-knows about knowledge-intensive-companies EIS: A tool in the net zero journey, despite renewables ban How the rise of healthtech is transforming our healthcare experience Going for growth with EIS EIS open offers jump by 24% Regulation 2023: It's more than just Consumer Duty EIS dealflow: Building pipelines for funding success Bionic Arms for Ukrainian soldiers Continuing professional development About Intelligent Partnership
See pages 3, 5, 8 and 9
See pages 3, 8 and 9
See page 7
See pages 4, 6, and 8
See pages 3 and 9
See pages 4, 6 and 8
About Intelligent Partnership
We organise focused events and provide a suite of materials to keep advisers and industry professionals up to date with the latest developments and on course to meet their training and CPD targets. Our range of engaging, accessible and CPD accredited resources includes:
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