Enterprise Investment Scheme (EIS)

For a diversified investment portfolio

Why invest in EIS?

Strong returns, portfolio diversity and taking an active role to fund regional companies that will shape the UK economic future are key drivers in the continued investor demand for Mercia’s Enterprise Investment Scheme (EIS) Fund to back entrepreneurs.

And of course, those inspired to invest can also reap the rewards for the tax relief that is designed to support entrepreneurialism.

You can read all about our most recent exit announced in July 2020, an 8.6 X sale of The Native Antigen, here.

 

Demonstrated strong performance

Mercia EIS Fund’s past performance is among the strongest in the industry, with early funds on target to achieve the 3x target including tax, with additional exits.

Mercia’s Complete Connected Capital Solution is combined with our unique investment strategy to deliver end-to-end funding to high-growth businesses.

We can fund companies with different pools of capital starting with Mercia’s EIS Funds or other third-party funds, and then selectively using Mercia’s proprietary capital. But equally, we also deploy our investment team of industry specialists with venture capital expertise, to work extensively with our portfolio companies to scale each business with the aim of ultimately delivering shareholder returns.

Mercia can provide a ‘Complete Connected Capital Solution’ for entrepreneurs and small companies, starting from seed rounds of £100,000, larger rounds of up to £2.0million, and building to funding rounds of £10.0million.

Our key information document (KID) for Mercia’s EIS Funds can be found here.

We are a regional investor

Mercia offers a unique hybrid investment model that drives value creation, controls risk and delivers profitable exits.

Mercia’s EIS Funds have an investment-led venture capital strategy, investing nationally with a focus on the under-served regions; specialising in the identification, creation, funding and scaling of innovative technology businesses with high growth potential, creating a strong investment proposition.

Mercia invests in the UK regions understanding that this is where the majority of high growth firms can be found. Whilst many of our peers focus their time in London or the South East, Mercia has built its camp around the UK regions which offers significantly greater potential to build value for our shareholders

Nearly 100 investment professionals and support staff

 

19 university partnerships

 

4 asset classes

 

1 complete capital solution

Gina Hood, Russell Fryer, Claire Anderson & Dr Paul Mattick, EIS

Complete Connected Capital Solution

A unique funding model incorporating private investor’s capital, institutional co-investment and Mercia can fund companies with different pools of capital, initially via its own EIS Funds or other third-party funds, and then selectively using Mercia’s proprietary capital. Mercia is therefore able to provide a ‘Complete Capital Solution’ for entrepreneurs and small companies, starting from seed rounds of £100,000, larger rounds of up to £2.0million, and building to funding rounds of £10.0million.

Is EIS for you?

EIS is an investment opportunity geared towards a sophisticated investor who can tie up their capital for the long-term and who doesn’t need to draw an income from this investment.
Typically, EIS is for those with a high-risk appetite and long-term investment horizon and a desire to invest directly into fast-growth British companies. For those that may want to defer paying tax on a capital gain from selling business, who need to manage a large income tax bill, or who want to reinvest a tax-free lump sum from a pension, start-ups are an attractive asset class.

A sophisticated investor

Investors are demonstrating an increasing appreciation of risk, particularly against a backdrop of large valuations, dwindling returns and a new breed of Millennial investors that have seen titans unseated by new tech entering the market.

A well-diversified portfolio

The popularity of Enterprise Investment Scheme (EIS) Funds is bolstered by the range of opportunities a well-diversified portfolio of knowledge-intensive small companies can offer to help deliver the desired level of return. Especially those companies with IP and some traction. These companies have already proven themselves and EIS can offer them the investment injection they need to crystallise future success.

Tax-efficient technology fund

Our Mercia EIS fund is a tax-efficient technology fund, optimised to source, support and scale UK growth enterprise across key sectors in which we have deep expertise. The Fund aims to provide investors with access to a portfolio of high growth opportunities in pioneering technology-driven businesses combined with a risk managed investment strategy and attractive tax advantages.

Complete Connected Capital

At the heart of the our strategy lies the combination of Mercia’s ‘Compete Connected Capital Solutions’ and our unique investment strategy, designed to provide fledgling technology business with a singer investment partner solution, in addition to a sector specialist investment team, proprietary deal flow sources.

Mercia’s EIS Fund targets businesses with proven commercial traction, moderate capital requirements and competent, experienced management teams, across the following five technology-driven sectors; Life Sciences, Electronics & Telecom, Digital Solutions & Entertainment, Software & the IoT, and Advanced Materials & Specialised Manufacturing.

Minimum Investment: £25,000
Target portfolio size: Approximately 15 companies
Deployment timeframe: Each EIS fund aims to be fully invested within 12 months of the fund closing
Target performance: Mercia aims to triple invested capital (including income tax relief and loss relief)
Closing dates: We always have an EIS Fund open, with funds closing at the end of March, June and December of each year
To retain the tax reliefs, investors must hold the investment for a minimum of three years, with holding periods expected to be five to seven years
Our funds are unapproved by HMRC, meaning you can claim the tax reliefs based on when each underlying investment is made. Each company in the fund will have received advanced assurance prior to an investment being made
Investments are made into sectors which have modest capital requirements but high growth potential

 

Download our IM

 

Tax efficient benefits for the EIS investor

About EIS

Why invest in an Enterprise Investment Scheme (EIS) and what makes it tax efficient?

What makes EIS tax efficient?

EIS investments are highly tax efficient, with an upfront relief on income tax, and substantial downside protection in the form of loss relief; protecting up to 61.5% of the capital invested.

Your EIS investments will benefit from:

  • Tax-free upside profits, not capped by taxation
  • Loss relief protects each EIS investment on a deal-by-deal basis

The value of loss relief within a diversified venture capital portfolio should not be understated, as the downside is protected on a deal-by-deal basis, whereas the upside is not capped by taxation. If you are interested in investing in an EIS fund, please download our EIS information memorandum (IM). Below we have provided an overview which you might find helpful if you are looking to find out more about EIS Investment.

EIS – 30% income tax relief

30% income tax relief may be claimed against income tax paid or payable in relation to the current tax year on total investments up to £1,000,000 per investor.

Alternatively, an investor can opt to treat an investment as having been made in the prior tax year, in whole or in part, such that 30% tax relief is available against income tax paid or payable for that year.

EIS – Capital gains tax deferral

Capital gains tax deferral on unlimited gains invested in qualifying companies, in respect of gains that arise within three years before and 12 months after the date of investment.

EIS – Tax free capital gains

There is no capital gains tax liability on gains on the disposal of shares which have been held for at least three years in EIS qualifying companies or, if longer, three years after the company commenced its trade.

EIS – 100% inheritance tax exemption

Through the availability of BPR (business property relief), there may be 100% inheritance tax exemption on the death of the investor (or on certain lifetime transfers) for each individual investment that has been held for at least two years.

EIS – Loss relief

Loss relief (providing total tax relief of up to 61.5%). A loss on any qualifying investment in the portfolio, irrespective of the overall performance of the portfolio, can be offset by individuals against income of the tax year of the loss, or the previous tax year, or against capital gains (including against the tax liability that arises on the revival of any deferred gain) of the tax year of the loss and future years.

EIS schemes – tax efficient investment with substantial downside protection

In summary, EIS investing is a highly tax efficient vehicle for investing with an upfront rebate on income tax, and substantial downside protection in the form of loss relief; if EIS qualification is maintained throughout the holding period, an investor can only ever lose 38.5% of the capital invested.

The EIS Investor Centre

Information at your fingertips

Our Investor Centre is a mobile-friendly platform that enables investors, and their advisers, to access Mercia’s various services, with fully personalised reporting, including valuations, investment committee reports, tax certificates and loss relief letters. The Investor Centre features:

• Summary information, including subscription, our fees, amount invested in qualifying companies, valuations and distributed capital

• Investment performance, with or without tax advantages

• Digital copies of EIS tax certificates and loss relief letters

• Portfolio company investment papers, and quarterly valuation reports

• Our five-minute application form for existing investors, with no need to print and sign documents

• Bi-annual fund valuation reports and consolidated portfolio reports

1. Your most valuable clients need EIS

Within your client base, there will be some who are interested in EIS; perhaps have had a Capital Gain, or are approaching Life Time Allowance in their pensions, or perhaps they are successful entrepreneurs themselves.

We all know that EIS is just the tip of the iceberg for a client’s investment portfolio, and this represents the highest risk, highest reward allocation, which benefits from those attractive tax reliefs. However, if you don’t advise these clients of their options to invest in EIS, then your competitor IFAs will be certain to take advantage of this short-coming, and this could provide them with the opportunity that they need to take your highest value clients.

To keep your highest value clients on your books, you need to understand the new world of EIS (keep reading) and understand that portfolio diversity and identifying the best fund managers, are key to your clients’ experience and investment return.

2. EIS is now focused on capital growth

Historically, two types of EIS funds existed:

Capital preservation EISs

  • Where returns were modest, but in theory the risk of capital loss was low
  • It is notable that the number of Capital Preservation EISs have returned less than 100p in the £1 invested, and many of these strategies are not exiting in a “timely” fashion.

Capital growth EISs

  • Where the fund manager or investor sought capital gain over the long-term.
  • Investing in a portfolio of high-growth companies, expecting losses and high multiple returns.

Both types of EIS investment benefitted from generous tax benefits, including income tax reliefs on their investment in the short-term, tax-free capital gains and IHT relief in the medium to long term. The portfolios of Capital Growth EISs also benefit from Loss Relief being available on a company by company basis, should any of these investments fail.

The government identified that Capital Preservation EISs were abusing the system, and decided to disqualify these schemes, which previously invested in solar and crematoria. Therefore, investors are looking to their advisors to provide informed advice on switching to EIS funds that target capital growth.

Within any capital growth EIS fund, normally focused on technology companies, you need significant winners to offset the companies that fail. An example of a winner in the Mercia portfolio is Oxford Genetics. Oxford Genetics is a company which has received investment from five Mercia EIS funds, which has become a leader in innovative synthetic biology-based technologies for biologics discovery, development and delivery. Oxford Genetics has also benefited from Mercia’s novel funding model, as in addition to the EIS funding, it has received considerable investment from Mercia Technologies PLC and co-investment from Invesco Asset Management (one of Mercia’s shareholders).

3. Simplified advice process

EIS is small part of a financial advisor’s remit, so delivering a simplified process is crucial. Mercia is a multi-award winning EIS fund (Growth Investor Awards 2017, EISA 2018), and is one of the most active Venture Capital funds in the UK (Beauhurst 2018). Therefore, Mercia can rapidly build well-diversified funds of early-stage technology companies. With a broad portfolio, we aim to capture at least one company that will return ten times the original investment in the company, aiming to triple invested capital in 5-7 years, including the income tax relief.

As the sector EIS has matured, Mercia has become one of the more established providers, with a strong investment track record, including both investing and exiting companies. There will of course be new entrants, but their track record might be harder to evaluate. Against this background, IFAs should use the platforms and independent reviews (Allenbridge, Churchill and MICAP) to compare these offerings, so that they can have confidence in guiding their clients.

4. While the government has capped pension contributions, EIS is progressively being expanded

The government is progressively moving against the high burden of attractive pension schemes, lowering the cap of the Life Time Allowance to just over £1.0million. In contrast to this, successive governments have been expanding EIS, and the Knowledge Intensive Classification of EIS (although not relevant to all) which means that up to £2.0million can be invested per year (as opposed to £1.0million as a Lifetime Allowance for pensions)!

In theory, pension funds tend to invest in lower risk assets, whereas individual EIS investments are high risk and offer potentially high return; effective diversification offers the opportunity for EIS investments to provide a more consistent return. Pension tax reliefs are good, but EIS tax reliefs are also attractive, with 30% income tax relief, marginal rates on the remaining £0.70 in the pound that is exposed to risk. For 45% tax payers, 61.5% of capital is protected, and those with CGT tax to defer, more than 61.5% is protected.

With Mercia’s strong processes, experienced investment committees and corporate governance in place, our funds are doing well and are expected to accelerate as some companies achieve their full value. Mercia is a highly experienced investor, and we expect to provide superior returns, in addition to tax benefits for your clients. Our EIS Fund is amongst the top of the market in terms of performance; as Mercia’s EIS Funds average EIS performance is 2.4 x cost, or 2.8x cost with tax reliefs i.e. if you invest £100,000 four years ago, it would be valued at £240,000, or £280,000 with tax reliefs.
Our view? Investment in EIS offers an exciting opportunity for those looking to invest in the technology sector and benefit from generous tax relief.

 

Enterprise investment scheme relief: Examples

Example 1

On behalf of an investor in the EIS Fund, the Manager invests £50,000 on 1 October 2014 in shares in an EIS qualifying company that has already commenced trading. The investor had realised a taxable gain of over £50,000 in 2012, on which he had paid capital gains tax at a rate of 28%.

The investor opts to treat his investment as having been made in the 2013/14 tax year and receives an income tax repayment through Carry Back Relief of £15,000 (£50,000 @ 30%). He also claims Capital Gains Deferral and receives a CGT repayment of £14,000 (£50,000 @ 28%). The net cost of his investment becomes £21,000.

In May 2018 the investment is sold for £250,000. There has been no breach of EIS qualifying conditions so Capital Gains Exemption applies, and no tax is due on the realised gain. However, the deferred gain of £50,000 comes back into the charge to tax. On the assumption that the CGT rate has remained at 28%, and that the investor does not claim further Capital Gains Deferral, CGT of £14,000 is payable on 31 January 2020.

For a net cost of £35,000, the investor has realised £250,000, plus the benefit of deferring CGT of £14,000 for approximately five years.

Example 2

The circumstances are as in Example 1, except that the investor has not realised other gains and, unfortunately, the investment fails completely in July 2016.

The investor opts to treat his investment as having been made in the 2013/14 tax year and receives an income tax repayment through Carry Back Relief of £15,000 (£50,000 @ 30%). The net cost of his investment becomes £35,000.

In the 2016/17 tax year the investor claims Loss Relief for his realised loss of £35,000 and opts to set it against his taxable income of the 2015/16 tax year, in which his marginal income tax rate was 45%. He receives an income tax repayment of £15,750. The total cost of his failed £50,000 investment is £19,250.

Example 3

The circumstances are as in Example 1 but, sadly, the investor dies very shortly before the sale of the investment in May 2018. The investment is sold on behalf of his estate.

As in Example 1, the net cost of the £50,000 investment becomes £21,000. On sale of the investment (on the assumption that there has been no growth in value since the investor’s death) no tax arises and the deferred gain of £50,000 does not come back into the charge to tax.

For a net cost of £21,000, the investor and his estate have realised £250,000. Also, through the availability of BPR, the investment attracts complete exemption from inheritance tax which might otherwise have been charged at a rate of 40% of the value of the investment.

Venture Capital Trusts

The Northern Venture Capital Trust (VCT) Funds back high-quality management teams in businesses that have the potential for significant growth.

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