••• The Tax Efficient Review •••


Introduction To EIS Open EIS Funds Order EIS Prospectus

ENTERPRISE INVESTMENT SCHEMES (UPDATED 18 September 2009)

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2009 BUDGET CHANGES
* Prior to the 2009 Finance Act, the EIS rules required that 80 per cent of the money raised by the issue of shares be employed for the purposes of a qualifying activity within 12 months of the issue of the shares or, if later, of the commencement of a qualifying activity. The balance was required to be employed within a further 12 months. The Finance Act 2009 replaced these rules with a single requirement that all of the money raised by the issue of shares be wholly employed within two years of the issue of shares or, if later, within two years of the commencement of a qualifying activity.

* Prior to 2009 an investor could carry back income tax relief to the previous year by claiming that qualifying shares were treated as having been issued in the previous year. This was restricted to shares issued before 6 October and subject to a limit of half of the subscriptions in that period, up to an overall limit of £50,000 subscribed. The Finance Act 2009 removed these restrictions. The total investment that can be taken into account for the purposes of calculating income tax relief for any particular year will remain subject to a limit, currently £500,000 subscribed.

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RISK WARNINGS

* EIS companies are unquoted

* The value of EIS Shares can fluctuate and Investors may not get back their investment;

* There is no market for EIS Shares and Shareholders may not be able to realise their shareholding unless the EIS company is sold or floated on a recognised Stock Exchange. Dividends may not be paid.

* Potential Investors should consider that past performance of the EIS Manager is no indication of future performance and there can be no guarantees that the EIS Company will meet its objectives.

* Investment in unquoted companies can offer good investment returns, but, by its uncertain nature involves a much higher degree of risk than investment in a quoted portfolio.

* Whilst it is the intention of the EIS Directors that the EIS company will be managed so as to qualify as an EIS, there can be no guarantee that it will maintain such status. A failure to qualify could result in the Company losing the tax reliefs previously obtained, resulting in adverse tax consequences for Investors, including a requirement to repay the 20 per cent. income tax relief.

* Fees charged by the EIS. Usually there is an initial cost of around 5%-10% to cover issuing the prospectus and paying a commission to introducers. This is paid out of the initial investment paid by the investor and the effect is that the EIS company receives around 90%-95%. Thereafter annual running costs of about 3%-3.5% are incurred by the EIS and met out of EIS income. On top of these, the EIS management usually have a performance incentive which pays a proportion of the return made usually after meeting some hurdle. A typical incentive might be that the management receives 40% of any uplift in net asset value over a 7% per annum hurdle.

* Levels and bases of, and relief from, taxation are subject to change. Such changes could be retrospective.

* EIS qualifying companies have gross assets of not more than £7 million prior to investment. Such companies generally have a high risk profile. Investors are advised to seek independent advice as to the suitability of investing in EIS companies.

* Two new conditions as to EIS qualification were introduced by the Finance Act 2007 which apply from 19 July 2007. Firstly, a qualifying company must have no more than 50 full time equivalent employees at the time of the share issue. Secondly, a company can raise no more than £2m in any 12 month period after 19 July 2007 from any or all of the Enterprise Investment Scheme, the Corporate Venturing Scheme and Venture Capital Trusts.

* In the 2008 Budget the maximum annual investment in EIS companies was increased to £500,000.
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EIS COMMENTARY

The EIS has long been the poor relation to the Venture Capital Trust, but the changes in various Budgets now leave the EIS as the only tax efficient investment offering a capital gains tax deferral. The maximum that can be invested in EIS in the tax year 2009/10 is £500,000 and the same amount can be carried back to the previous year provided there is tax capacity in that tax year.

The types of EIS on offer in the 2009/10 tax year have changed our overall approach to the market segmentation of EIS products, which is based on our view that investors need to understand the inherent risk of each offering.

Our new categories are:

Lower risk

1. EIS Limited Life Funds with some form of capital protection where the main objectives are capital preservation and returning cash to investors as soon as possible after the three year period. The aim is to try to achieve this by engaging in trades where there is either asset-backing or the trade involves predictable future cash-flows from credit-worthy clients.

Could appeal mainly to risk averse investors seeking to defer capital gains tax.

Medium to high risk

2. Venture capital funds across multiple sectors. These are generalist funds investing in a portfolio of unquoted companies which qualify for EIS status. The aim is to produce capital gains usually within the next three to five years from investing in opportunities usually only accessible to venture capitalists, institutional investors and very high net worth individuals.

Could appeal mainly to investors interested in a spread of long-term investments with hopefully considerable upside.

3. Specialist trading companies within a single sector. This group focus their investment on one trade and in a number of offerings the trade will offer some form of downside protection. The Fund offerings are where more than £2m is being raised so the investor will end up as an investor in a series of sub-£2m qualifying companies.

Could appeal to investors interested in potential upside but are not looking for a sector spread, probably achieving this by investing in a number of these specialist EIS offerings.

4. Portfolios of AIM listed qualifying companies. Certain new share issues from AIM listed companies qualify for EIS relief. The managers in this group specialise in building qualifying portfolios of AIM listed stocks. EIS qualifying AIM floats deal flow at present in our view is uncertain.

Could appeal to investors looking for capital gains and the perceived liquidity of an AIM listing.