A timely client planning scenario

For illustration purposes, let us look at how a client might make use of EIS.

Chris is in his late 40s. He is self-employed and a high earner, although his income can fluctuate from one year to the next.

In fact, Chris often does not know what his tax bill will be until his accountant has finished preparing his tax return.

He has a diversified investment portfolio and is an experienced investor. Over the years, Chris has made it clear he is open to being adventurous with a portion of his portfolio. He is happy to take more risk to target significant growth. 

Tax year-end is just a few months away and Chris wonders if there are any opportunities available that would allow him to offset an income tax bill from the previous tax year, while also supporting his wider planning objectives.

He makes a call to his financial adviser. 

Chris meets with his adviser, Helena. She considers Chris’s needs, goals and appetite for risk, before suggesting a potential investment that could work for him.

Helena explains that one of the benefits of investing in companies that qualify under the EIS is the ability to carry back income tax relief to the previous tax year.

Typically, relief can be claimed in the year that money is invested into each individual EIS company, or the previous year. This can make offsetting income tax from the prior year difficult when investing in an EIS portfolio at the end of the tax year.  

However, Chris could invest in a knowledge intensive EIS fund, which would give him access to a diverse portfolio of early-stage companies with high growth potential. 

Importantly, the relevant date for income tax relief when investing in a knowledge intensive fund is the date the fund closes, rather than the date each underlying investment is made. 

That means Chris could invest in a fund that will close this tax year, once his income tax bill for the prior year is known, and still claim relief against this earlier tax year.

His investment would provide him a single certificate that he could use to claim up to 30 per cent income tax relief once all of the fund has been invested.

What should an adviser look for in an EIS manager?

There are lots of factors to consider when choosing the right specialist manager for your clients. 

Among these factors, make sure you pay special attention to the following: 

• What is the EIS manager’s experience of choosing and investing in smaller companies? Past performance is not a guarantee of future returns, but you will want to see an established network of potential investments and an experienced investment team.
• It takes time to deploy a client’s money and to sell EIS shares. It might be worth choosing an EIS manager with a good track record of deployment and of providing viable exit opportunities.
• EIS can be a complex investment. So, how does the manager make the investment as easy as possible for your client?

Jessica Franks is head of retail investment products at Octopus Investments