Realisation time for EIS – now is a good time to start thinking about tax planning

Realisation time for EIS – now is a good time to start thinking about tax planning

Now is a good time to start thinking about tax planning and when looking to EIS within that planning, the performance of fund managers, says Chris Hood, sales director, Seneca Partners.

With the latest tax year behind us, there is a likely to be a little more clarity on what 2021/22 tax liabilities might ultimately be. This is a good time to get ahead of the game and start to think about tax planning in advance. Early investment in EIS should enable the majority of necessary EIS paperwork to be to hand by the time tax returns are filed next January, which should be helpful in ‘neutralising’ any tax paid or due.

Whilst the trend towards planning early is growing, it is worth casting an eye over some key facts when looking at which EIS providers to choose.

The ‘killer’ issue is that of realised value versus unrealised value. Investment outcomes are mainly measured by the extent of cash returned to investors upon exit. Until that point, it can’t be viewed as much more than hope value.

Setting the scene

First up, it is highly unlikely that any funds raised after 2018 will have achieved an exit. Therefore, we can only judge a manager’s exit track record on the level of cash returned to their investors on investments made before then. Otherwise, despite whatever the carrying values show, the investments have still yet to be realised.

So, if you are looking for proven exit track records as a basis for assessing the credentials of the manager, this factor alone will dramatically narrow the field. According to research recently carried out by one of the main reviewers in the market of over 50 live EIS funds, less than half have produced any exits at all, as at December 2021. Only four have returned circa 50% or more of their total EIS fund values. That suggests that a very substantial amount of current EIS Funds Under Management still resides in the unrealised return compartment.

What does this mean?

It may well be the case that managers who have entered the market since 2018 have some good performers within their portfolios, which will hopefully prove good for investors in due course.

Of more significance is a manager’s track record of exits for investments which have been running for five years or more with no visible exit event. It is fair to say that investment horizons have become more stretched since the rule changes of 2018 but this does bring another issue into the debate.

An investor with a pre-2016 portfolio for example, will soon be going into the sixth year. Either the portfolio will still be held at cost, or valuations will have been moved in one direction or another. Usually, managers mark them up based on further fundraising rounds at a higher price or because there have been positive developments at company level. This is expected at individual company level but probably not for entire portfolios.

By this point they should be some indication from the Fund Manager of how and when this value will be realised. If, after six years invested a portfolio is valued much higher than it originally cost, investors are entitled to ask why none have been realised. Where there have been adverse developments, realistic prospects of recovery need to be assessed.

There is also the issue of whether further funding will be needed by these companies to stand a chance of achieving any return. Raising funds for a company which is struggling is no easy task – particularly where there is a lengthy back story and investors need to be aware if that is where their subscriptions are to be deployed.

Failures generally manifest themselves in the early years following investment with the prospect of loss relief being available for investors to claim.

Unrealised values

Unrealised company valuations can be something of a double-edged sword. On the one hand, upward movements are comforting to investors and advisers alike and make for much more cordial client review meetings. Impaired or even ‘at cost’’ values are never quite so popular.

However, the crux of all this still lies in how and when this carrying value will be realised. The expectation is usually that those companies with a progressive valuation profile should become attractive acquisition targets, or in some cases IPO candidates.

These are not ‘givens’ and contain a number of complex challenges before coming to fruition – often with challenges to the carrying values themselves. Investors will be keen to know timeframes around these processes, which is a common reason why EIS investments can end up stretching out towards 10 years and is probably well beyond the expectation of investors at the point they originally invested.

And those are the better case scenarios.

The bigger concern involves those companies which reside within investors’ portfolios and which have remained ‘at cost’ for a significant number of years. If there has been nothing of note within four or five years of investment, what lies in store that will change this in the foreseeable future?

What is the current cash position of these companies and how well placed are they to see the journey through? Continual funding rounds should be viewed with some caution because they are unlikely to have been completed without a reduction in value not least because of the dilution effect of the fundraise.

Life Sciences and Bio-techs often fall into this category as drug discovery and the many clinical trials devour cash, often with little commercial income to support them – itself a reason why calls on shareholders can become a regular occurrence.

Those companies which sit inside investor portfolios and have been shown at ‘below cost’ for an extended period probably need their prospects of delivering a future return to be re-assessed.

AIM EIS funds

These funds often carry the ‘volatile’ tag but that is largely due to them being subject to daily pricing which their private company counterparts are not. If market conditions are volatile, then this is normally also a macro-economic factor which affects all companies and would certainly affect the ability of a private company to realise its value in any event.

AIM EIS funds generally come with a higher degree of due diligence and transparency by virtue of being quoted on the stock market and the regulatory news flow reflects in the share price.

The major benefit of AIM EIS Funds is that they are usually far more liquid and therefore investors can see a realistic point at which they can exit, which is hopefully much closer to the three-year minimum EIS holding period than is the case with private companies. For this reason, the 30% initial tax relief is more impactful than is the case where investors are forced to hold for a much longer period of time.

The realisation

It is essential therefore that investors and advisers take the time to assess how EIS managers have performed over a period of time and exactly how much cash has been returned to investors. The investment risk of EIS investing is a well-trodden path, but a little extra time taken to examine the realised return performance of Managers rather than the hope value of unrealised returns is likely to prove worthwhile.

Read the article on Professional Paraplanner: https://professionalparaplanner.co.uk/realisation-time-for-eis/

Important information

This information is of a general nature and does not constitute an offer to provide services.

Any opinions or conclusions attributable to Seneca Partners are based on the understanding of the available information at the time of publication. Such opinions or conclusions are subject to change without notice.

The value of investments and/or any income arising from them may fluctuate.

Past performance is not necessarily a guide to future performance.

Important notice

The products and services shown on this website place capital at risk. Investors may receive less in returns than they have invested. Investments may not allow for capital to be withdrawn on demand. If an investment provides tax relief then this relief is subject to change and is dependant on personal circumstances. Any reference to past performance or forecasted performance is not a reliable indicator of future performance.

Seneca Partners recommends that any investor seeks specialised financial and/or tax advice before investing. Seneca Partners does not provide advice and the information on this website, including but not limited to news, should not be construed as such.

Please confirm that you understand this warning and wish to proceed.

Risk summary

(Estimated reading time: 2 minutes)

Due to the potential for losses, the Financial Conduct Authority (FCA) considers this investment to be high risk.

What are the key risks?

  1. You could lose all the money you invest
    • If the business you invest in fails, you are likely to lose 100% of the money you invested. Most start-up businesses fail.
    • Advertised rates of return aren’t guaranteed. This is not a savings account. If the business doesn’t pay you back as agreed, you could earn less money than expected or nothing at all. In addition, if the tenant of the property being financed doesn’t pay the rent due as agreed or vacates the premises, you could earn less money than expected. A higher advertised rate of return means a higher risk of losing your money.
  2. You are unlikely to be protected if something goes wrong
    • Protection from the Financial Services Compensation Scheme (FSCS), in relation to claims against failed regulated firms, does not cover poor investment performance. Try the FSCS investment protection checker at https://www.fscs.org.uk/check/investment-protection-checker/.
    • Protection from the Financial Ombudsman Service (FOS) does not cover poor investment performance. If you have a complaint against an FCA-regulated firm, FOS may be able to consider it. Learn more about FOS protection at https://www.financial-ombudsman.org.uk/consumers.
  3. You won’t get your money back quickly
    • This type of business could face cash-flow problems that delay payments to investors. It could also fail altogether and be unable to repay any of the money owed to you.
    • Even if the business you invest in is successful, it may take several years to get your money back. You are unlikely to be able to sell your investment early.
    • Even if you are able to sell your investment early, you may have to pay exit fees or additional charges.
    • The most likely way to get your money back is if the business is bought by another business or is wound
      up following the sale of the underlying property. These events are not common.
    • If you are investing in a start-up business, you should not expect to get your money back through dividends. Start-up businesses rarely pay these. This investment aims to make quarterly repayments that comprise both a partial repayment of capital and interest, although this is not guaranteed. It could take over 14 years to receive back an amount equal to the amount you invested.
  4. This is a complex investment
    • This makes it difficult to predict how risky the investment is, but it will most likely be high.
    • You may wish to get financial advice before deciding to invest.
  5. Don’t put all your eggs in one basket
    • Putting all your money into a single business or type of investment for example, is risky. Spreading your money across different investments makes you less dependent on any one to do well.
    • A good rule of thumb is not to invest more than 10% of your money in high-risk investments. (See https://www.fca.org.uk/investsmart/5-questions-ask-you-invest).

If you are interested in learning more about how to protect yourself, visit the FCA’s website at www.fca.org.uk/investsmart

Application Form Request – Seneca IHT Service


Application Form Request – Seneca AIM EIS Fund


Application Form Request – Seneca EIS Portfolio Fund


Application Form Request – Seneca IHT Service


Application Form Request – Seneca AIM EIS Fund


Application Form Request – Seneca EIS Portfolio Fund


Risk summary

(Estimated reading time: 2 minutes)

Due to the potential for losses, the Financial Conduct Authority (FCA) considers this investment to be high risk.

What are the key risks?

  1. You could lose all the money you invest
    • If the business you invest in fails, you are likely to lose 100% of the money you invested.
    • Many of the loans ultimately financed by your investment are made to borrowers who can’t borrow money from traditional lenders such as banks. These borrowers have a higher risk of not paying back their loan.
    • Advertised rates of return aren’t guaranteed. If a borrower doesn’t pay back their loan as agreed, you could earn less money than expected. A higher advertised rate of return means a higher risk of losing your money.
  2. You are unlikely to be protected if something goes wrong
    • Protection from the Financial Services Compensation Scheme (FSCS), in relation to claims against failed regulated firms, does not cover poor investment performance. Try the FSCS investment protection checker at https://www.fscs.org.uk/check/investment-protection-checker/.
    • Protection from the Financial Ombudsman Service (FOS) does not cover poor investment performance. If you have a complaint against an FCA-regulated firm, FOS may be able to consider it. Learn more about FOS protection at https://www.financial-ombudsman.org.uk/consumers.
  3. You won’t get your money back quickly
    • Some of the loans financed by your investment will last for several years. You may need to wait for your money to be returned even if the borrower repays on time.
    • Some Managers may give you the opportunity to sell your investment early through a ‘secondary market’, but there is no guarantee you will be able to find someone willing to buy.
    • Even if your agreement is advertised as affording early access to your money, you will only get your money early if someone else wants to buy your shares or the company in which you are invested has sufficient available capital to buy them from you. If no one wants to buy, it could
      take longer to get your money back.
    • If you are investing for growth, you should not expect to get your money back through dividends as the Service is not designed to pay dividends to investors seeking growth. If you are investing for income, it will take at least 25 years to get your money back purely through dividends.
  4. Don’t put all your eggs in one basket
    • Putting all your money into a single business or type of investment for example, is risky. Spreading your money across different investments makes you less dependent on any one to do well.
    • A good rule of thumb is not to invest more than 10% of your money in high-risk investments. (See https://www.fca.org.uk/investsmart/5-questions-ask-you-invest).
  5. The value of your investment can be reduced
    • The percentage of the business that you own will decrease if the business issues more shares. This could mean that the value of your investment reduces, depending on the basis on which these new shares are issued.
    • If these new shares have additional rights that your shares don’t have, such as the right to receive a fixed dividend, this could further reduce your chances of getting a return on your investment.

If you are interested in learning more about how to protect yourself, visit the FCA’s website at www.fca.org.uk/investsmart

Risk summary

(Estimated reading time: 2 minutes)

Due to the potential for losses, the Financial Conduct Authority (“FCA”) considers this investment to be high risk.

What are the key risks?

  1. You could lose all the money you invest
    • If a business you invest in fails, you are likely to lose 100% of the money you invested in that business. Most start-up businesses fail. Please see page 14 of the Information Memorandum for an overview of the types of businesses this fund invests in.
  2. You are unlikely to be protected if something goes wrong
    • Protection from the Financial Services Compensation Scheme (FSCS), in relation to claims against failed regulated firms, does not cover poor investment performance. Try the FSCS investment protection checker at https://www.fscs.org.uk/check/investment-protection-checker/.
    • Protection from the Financial Ombudsman Service (FOS) does not cover poor investment performance. If you have a complaint against an FCA-regulated firm, FOS may be able to consider it. Learn more about FOS protection at https://www.financial-ombudsman.org.uk/consumers.
  3. You won’t get your money back quickly
    • Even if the business you invest in is successful, it may take several years to get your money back. You are unlikely to be able to sell your investment early.
    • The most likely way to get your money back is if the business is bought by another business or your shares are sold on the Alternative Investment Market. The latter can only occur if there is a willing buyer.
    • If you are investing in a start-up or EIS qualifying business, you should not expect to get your money back through dividends. Such businesses rarely pay these.
  4. Don’t put all your eggs in one basket
    • Putting all your money into a single business or type of investment for example, is risky. Spreading your money across different investments makes you less dependent on any one to do well.
    • A good rule of thumb is not to invest more than 10% of your money in high-risk investments. (See https://www.fca.org.uk/investsmart/5-questions-ask-you-invest).
  5. The value of your investment can be reduced
    • The percentage of the business that you own will decrease if the business issues more shares. This could mean that the value of your investment reduces, depending on how much the business grows. Most start-up businesses issue multiple rounds of shares.
    • These new shares could have additional rights that your shares don’t have, such as the right to receive a fixed dividend, which could further reduce your chances of getting a return on your investment.

If you are interested in learning more about how to protect yourself, visit the FCA’s website at www.fca.org.uk/investsmart

Risk summary

(Estimated reading time: 2 minutes)

Due to the potential for losses, the Financial Conduct Authority (“FCA”) considers this investment to be high risk.

What are the key risks?

  1. You could lose all the money you invest
    • If a business you invest in fails, you are likely to lose 100% of the money you invested in that business. Most start-up businesses fail. Please see page 14 of the Information Memorandum for an overview of the types of businesses this fund invests in.
  2. You are unlikely to be protected if something goes wrong
    • Protection from the Financial Services Compensation Scheme (FSCS), in relation to claims against failed regulated firms, does not cover poor investment performance. Try the FSCS investment protection checker at https://www.fscs.org.uk/check/investment-protection-checker/.
    • Protection from the Financial Ombudsman Service (FOS) does not cover poor investment performance. If you have a complaint against an FCA-regulated firm, FOS may be able to consider it. Learn more about FOS protection at https://www.financial-ombudsman.org.uk/consumers.
  3. You won’t get your money back quickly
    • Even if the business you invest in is successful, it may take several years to get your money back. You are unlikely to be able to sell your investment early.
    • For companies whose shares are not listed on any exchange (‘unquoted’ or ‘private’ companies), the most likely way to get your money back is if the business is bought by another business or lists its shares on an exchange such as the London Stock Exchange. These events are not common.
    • For companies whose shares are listed on an exchange (such as the AQSE or AIM), the most likely way to get your money back is if the business is bought by another business or your shares are sold on that exchange. The latter can only occur if there is a willing buyer.
    • If you are investing in a start-up or EIS qualifying business, you should not expect to get your money back through dividends. Such businesses rarely pay these.
  4. Don’t put all your eggs in one basket
    • Putting all your money into a single business or type of investment for example, is risky. Spreading your money across different investments makes you less dependent on any one to do well.
    • A good rule of thumb is not to invest more than 10% of your money in high-risk investments. (See https://www.fca.org.uk/investsmart/5-questions-ask-you-invest).
  5. The value of your investment can be reduced
    • The percentage of the business that you own will decrease if the business issues more shares. This could mean that the value of your investment reduces, depending on how much the business grows. Most start-up businesses issue multiple rounds of shares.
    • These new shares could have additional rights that your shares don’t have, such as the right to receive a fixed dividend, which could further reduce your chances of getting a return on your investment.

If you are interested in learning more about how to protect yourself, visit the FCA’s website at www.fca.org.uk/investsmart