1. Enterprise Investment Schemes (EIS)
For SimplyBiz only

2. Important notice For SimplyBiz only
This presentation has been prepared for SimplyBiz only and has not been approved for any other purpose.
If you forward this document to any other person, you must ensure that you have taken responsibility for it under the financial promotion rules. The information contained herein is in summary form, subject to change, and has been set out for illustrative purposes only and no reliance should be placed upon it. Investment decisions should be based only on the relevant product literature.
The case studies set out in this presentation are for illustrative purposes only and should not be relied upon as investment advice. The risk profiles of EIS investment may be significantly higher than other alternatives.
Downing LLP, St Magnus House, 3 Lower Thames Street, EC3R 6HD, is authorised and regulated by the Financial Conduct Authority, Firm Reference Number
12 June 2018

3. Key risks
The key risks associated with EISs are listed below – please refer to the relevant product literature for a full list of risks.
Capital is at risk: EISs invest in small unquoted companies which are higher risk by nature than larger companies. The value of EIS investments may go down as well as up and investors may not receive back the full amount invested. In addition, there is no certainty as to the level of income. Shares in these companies may be difficult to sell.
EISs are long-term investments: investors should be prepared to hold EIS shares for a minimum of three years to qualify for the available tax reliefs.
Qualifying investments are not guaranteed: there is no guarantee that sufficient investments in EIS companies will be made within the expected timetable, or at all
Tax reliefs are not guaranteed: all tax reliefs are subject to change in the future and personal circumstances. The availability of the tax reliefs depends on an EIS company retaining its qualifying status, and if this is not met, it could result in the loss of tax relief. If you need further guidance, please refer to HMRC’s website.
Past performance is not a reliable indicator of future results and there is no guarantee that the service’s objectives will be achieved.

4. Learning objectives
Understand how EIS investments have evolved over the years.
Understand how loss relief is calculated.
Understand how EIS is useful in deferring CGT and using the clients CGT yearly allowance.
This example is set out for illustrative purposes only and should not be relied upon.

5. Background Changes to EIS rules Examples Restaurant business
Independently run and aims to grow its trade by opening a new store.
This business would qualify* – it does not lose eligibility because it owns substantial assets. There is a risk that the business will not grow.
Life sciences company
Wants to build its own research facility to expand existing operations.
This business would qualify* – using funding to create a substantial asset does not make it ineligible because the asset is not being used to give investors a protected low risk return.
Wedding venue
A company is set up to acquire and operate a wedding venue, targeting low returns (with returns in excess of the target capped by the fund manager) and an early exit.
This business is unlikely to qualify – these conditions suggest that the business has a low risk profile, a capital preservation strategy and does not intend to grow over the long term.
However, a genuine entrepreneurial company owning and operating a wedding venue and seeking investment for long-term growth would qualify*.
Let’s take a look at some examples of companies that may/may not be eligible for EIS funding under the new ‘risk to capital’ condition.
An investment in a restaurant business that is independently run and wants to grow its trade by setting up a new outlet would qualify. The fact that it has substantial assets (premises, kitchen equipment) does not mean that it loses eligibility because HMRC will look at the investment in the round, including the intention to engage employees. In this case, investors would be taking a risk that the restaurant can grow its business.
An investment in a life sciences firm that wants to build its own research facility to expand its existing operations would qualify. The fact that it is using funds to create a substantial asset does not make it ineligible, because the company already has employees who will be working in the new facility - and the company may engage new employees - and the asset is not being used to give investors a protected low risk return.
An investment in a company set up to acquire and operate a wedding venue, targeting low returns to be achieved by an early exit, with returns in excess of the target capped by the fund manager, would be unlikely to qualify. The low targeted returns and plans for an early exit indicate an absence of any intention to grow and develop the company's trade in the long term, while the capping of returns above the target suggests a low risk profile and is also an indicator capital preservation. By contrast, a genuine entrepreneurial company owning and operating a wedding venue, seeking investment for long-term growth, would qualify.
*Companies will need to meet all other qualifying EIS conditions. These examples are used to illustrate the ‘risk to capital’ condition and do not provide formal guidance.

6. Potential EIS investors
Clients looking for income tax relief.
Clients looking for inheritance tax relief.
Clients looking to defer capital gains.
Clients looking to combine the above reliefs.

7. Timescales for deferring capital gains tax (CGT)
Past gains – made up to three years prior to allotment of EIS shares.
Future gains – made within twelve months of EIS shares being allotted.

8. Deferral of CGT in action
£100,000 gain made by client and invested into an EIS.
Income tax relief £30,000.
Capital gains tax deferred £28,000.
On sale of EIS investment £28,000 CGT liability becomes payable – less an annual CGT allowance of £11,700. Net CGT payable £16,300.
Income tax saved £30,000 and CGT saved £11,700.
This example assumes that the gain is made by a higher-rate taxpayer from the sale of a residential property.
Please note that these examples are set out for illustration purposes only. Risk profiles of these examples may be higher than other alternatives. Loss relief has been ignored in this illustration.

9. EIS case studies EIS and mitigating capital gains tax
Deferred gain comes back to charge
Amount invested
Proceeds
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
Company 1
Company 2
Company 3
Company 4
Company 5
Company 6
Company 7
Company 8
Company 9
Company 10
Total
Annual allowance
CGT liability
CGT at 28%
CGT deferred on £100,000
Less CGT to be paid
Deferred capital gains mitigated across investment lifetime £0
£20,000
£7,500
£15,000
£30,000
£107,500 £0
£11,700
£10,000
£11,700 £0
£10,000
£20,000
£11,700
£8,300
- £2,324
£10,000
£20,000
£11,700
£8,300
- £2,324
£10,000
£20,000
£11,700
£8,300
- £2,324
£10,000
£20,000
£11,700
£8,300
- £2,324
£10,000
£11,700 £0
£28,000
- £9,296
£18,704
£10,000
£100,000
Please note that these examples are set out for illustration purposes only. Risk profiles of these examples may be higher than other alternatives. Loss relief has been ignored in this illustration.

10. How to claim CGT deferral
EIS3 certificate
Sent to your clients by HMRC typically within 4 – 6 months of an investment being made in each EIS company, subject to HMRC approval.
A Guide is available at the Downing stand.

11. Claiming loss relief on an EIS investment
Losses made on EIS investments can be offset against income or gains.
Income – elect for the loss to be offset against income in the current or previous tax year but not both.
Capital gains – elect for the loss to be offset against gains arising in the current tax year or carry the loss forward to set against future gains

12. Loss relief in action Client invests £100,000 in one EIS company.
Client benefits from £30,000 income tax relief.
Company fails and valued at £0.
Loss relief is available on loss net of income tax relief, e.g.:
£100,000 - £30,000 x 40% = £28,000 of loss relief (based on a higher rate income tax payer).
Please note that these examples are set out for illustration purposes only. Risk profiles of these examples may be higher than other alternatives. Assumes the investor is a higher rate taxpayer.

13. Loss relief in action
Invest £100,000 in 10 EIS companies (£10,000 each)
£50,000
£75,000 £0
Using EIS loss relief
Gross proceeds
£125,000
Less: cost
-£100,000
Gross return
£25,000
Capital gains tax
(Tax-free capital gains through EIS) £0
Income tax relief (30%)
£30,000
Loss relief offset against income (40%)
£11,200
Profit after tax
£66,200
£10,000 in
1 company
£50,000 in
5 companies
£40,000 in
4 companies
0x return
1.5x return
1.5x return
5x return
As is the nature of making early-stage investments, we expect some winners and some losers. In the case where an EIS company does fail, irrespective of the performance of the overall portfolio, clients can elect to offset the lost relief against income or capital gains (but not both). The example above shows how this could work in practise.
In this example, the client invested £10,000 each in 10 EIS companies. One of the companies returns 5x the investment, five of the companies average a return of 1.5x the investment and four of the companies fail entirely.
Loss relief is offset against income (assuming the client is a 40% taxpayer), which totals £11,200 (£40,000 less the 30% income tax relief x 40%). Once the 30% income tax relief is factored in, plus the 0% CGT on the gains in the rest of the portfolio, the client is looking at a profit of £66,200 on their net investment, even though four of the companies in their portfolio have failed.
Please note that these examples are set out for illustration purposes only. Risk profiles of these examples may be higher than other alternatives. Assumes the investor is a higher rate taxpayer.

14. How to claim loss relief
SA108 form
Available at the Downing stand.

15. CGT deferral and loss relief in action
Deferred gain comes back to charge
Amount invested
Proceeds
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
Company 1
Company 2
Company 3
Company 4
Company 5
Company 6
Company 7
Company 8
Company 9
Company 10
Total
Annual allowance
CGT liability
CGT at 28%
CGT deferred on £100,000
Less CGT to be paid
Deferred capital gains mitigated across investment lifetime £0
£20,000
£7,500
£15,000
£30,000
£107,500 £0
£11,700
£10,000
£11,700 £0
£10,000
£20,000
£11,700
£8,300
- £2,324
£10,000
£20,000
£11,700
£8,300
- £2,324
£10,000
£20,000
£11,700
£8,300
- £2,324
£10,000
£20,000
£11,700
£8,300
- £2,324
£10,000
£11,700 £0
£28,000
- £9,296
£18,704
£10,000
£100,000
Loss relief claimed (offset against gains)
£2,800
£5,600
Please note that these examples are set out for illustration purposes only. Risk profiles of these examples may be higher than other alternatives. Loss relief has been used by a higher rate taxpayer at 40% against income.

16. CGT deferral and loss relief in action
£100,000 invested
£7,500 profit
£30,000 income tax relief
£18,704 CGT deferral
£11,200 loss relief
£167,404 total return to client
Please note that these examples are set out for illustration purposes only. Risk profiles of these examples may be higher than other alternatives.

17. Example investment timeline
Year 1
We send acknowledgement letters to your clients typically within seven business days of application.
Aim to allot funds to EIS-qualifying companies within 12 months.
Investors sent EIS3 certificates (to claim 30% income tax relief) typically within 4 – 6 months of an investment being made in each EIS company, subject to HMRC approval.
Year 2
Every quarter, your clients receive valuation statements.
We compile and send half-yearly reports with full details of each investment company, covering the six-month period to 30 June and 31 December.
Two years after the investment is made, it should qualify for IHT relief (so long as shares are held at death).
Year 3
The three-year holding period comes to end.
Follow-on EIS investment rounds are made into successful businesses.
We continue to support investee companies with regular communication, monitoring, advice and access to our network of later-stage VC funds.
Year 4
As the businesses mature, we can follow our initial early-stage EIS investments with VCT funding.
This can help the companies to scale, attracting further investment from later-stage rounds.
Year 5 onwards
Begin to exit from individual EIS companies.
Any gains are free from CGT.
Loss relief available on losses made on the sale of investments.
This example is set out for illustrative purposes only and should not be relied upon.

18. Example investment timeline
Year 1
We send acknowledgement letters to your clients typically within seven business days of application.
Aim to allot funds to EIS-qualifying companies within 12 months.
Investors sent EIS3 certificates (to claim 30% income tax relief) typically within 4 – 6 months of an investment being made in each EIS company, subject to HMRC approval.
This example is set out for illustrative purposes only and should not be relied upon.

19. Example investment timeline
Year 2
Every quarter, your clients receive valuation statements.
We compile and send half-yearly reports with full details of each investment company, covering the six-month period to 30 June and 31 December.
Two years after the investment is made, it should qualify for IHT relief (so long as shares are held at death).
This example is set out for illustrative purposes only and should not be relied upon.

20. Example investment timeline
Year 3
The three-year holding period comes to end.
Follow-on EIS investment rounds are made into successful businesses.
We continue to support investee companies with regular communication, monitoring, advice and access to our network of later-stage VC funds.
This example is set out for illustrative purposes only and should not be relied upon.

21. Example investment timeline
Year 4
As the businesses mature, we can follow our initial early-stage EIS investments with VCT funding.
This can help the companies to scale, attracting further investment from later-stage rounds.
This example is set out for illustrative purposes only and should not be relied upon.

22. Example investment timeline
Year 5
Begin to exit from individual EIS companies.
Any gains are free from CGT.
Loss relief available on losses made on the sale of investments.
This example is set out for illustrative purposes only and should not be relied upon.

23. Learning outcomes
Understand how EIS investments have evolved over the years.
Understand how loss relief is calculated.
Understand how EIS is useful in deferring CGT and using the clients CGT yearly allowance.
This example is set out for illustrative purposes only and should not be relied upon.

24. About Downing Established 1986.
We have raised £1.7 billion for UK SMEs across our range of investment products:
VCT
EIS
IHT products
Public equity
Crowd
Over £1 billion of funds under management, the majority of which are invested in, or lent to, small UK companies.
Some £255 million in respect of EIS FUM.
Launched 18 EIS offers, raising over £320 million for EIS-qualifying businesses.
Our portfolio consists of almost 200 small businesses in the UK.

25. St Magnus House, 3 Lower Thames Street, London EC3R 6HD
Downing is authorised and regulated by the Financial Conduct Authority (Firm Reference ) |