More and more people are asking me about Enterprise Investment Schemes (EIS) these days.

Maybe it’s because the well-off are weller-offer than ever before that these more obscure schemes are hitting their radar.

Perhaps it’s the squeezed middle resenting their tax bills.

In my personal life, I know it’s a consequence of an infuriating number of my friends joining the mid-seven-figures club on selling businesses. ¹

At the other end of the spectrum are the patrons of crowdfunding sites like Seedrs and Crowdcube. These platforms heavily promote the tax benefits of investing in start-ups that qualify for EIS status.

And crowdfunding is indeed – for good or ill – very accessible.

EIS funds can have high minimum investment hurdles. If you can’t slap down tens of thousands with some of them, your name’s not on the door.

In contrast, I’ve claimed 30% tax relief on a £10 EIS investment with Seedrs. I even got a pizza and beer thrown in.

So – free nosh aside – what’s all the fuss about?

What are Enterprise Investment Schemes?

Enterprise Investment Schemes (EIS) are tax efficient investment vehicles offering 30-50% income tax relief.

EIS enable venture capital-style investing, with downside protection and tax-free capital gains.

Downside protection is a way of saying your maximum losses are reduced. This is due to upfront tax relief – a bit like getting cashback from HMRC on your initial investment. There’s also the possibility of reducing your tax bills with loss relief. This offsets EIS losses against income or capital gains.

Taking into account these reliefs, an investment of £1,000 into an EIS qualifying start-up might only expose you to a maximum loss of £375, if you’re a 45% taxpayer, even if the investment went to zero. ²

Of course, there’s an opportunity cost. You could have put your money into a global tracker instead. Then your £1,000 might have grown to £1,300 over three years, say, although this would be liable to tax.

You can invest into EIS-qualifying companies directly or via an EIS fund.

Further research might see you choose between:

• Approved versus unapproved funds

• Capital preservation versus capital growth

• EIS versus Seed EIS (SEIS)

Whether investing directly into EIS-qualifying start-ups or via EIS funds, you need to be happy with the companies themselves. Or else have a lot of faith in the EIS fund manager choosing them for you!

EIS versus VCTs

There are two specific tax-favoured ways to invest in start-ups in the UK:

• EIS offer tax benefits such as tax-free capital gains, income tax relief, and IHT and loss relief.

• Venture Capital Trusts (VCTs) offer tax-free dividends and income tax relief. Again, any (rarely substantial) capital gains can be tax-free.

Investors who annually max out their ISA allowances and pension contributions might find VCTs the logical next step.

I’d stress though that high costs and mediocre returns mean this isn’t a no-brainer. The benefits of tax relief can be outpaced in the medium-term by a taxable investment that grows faster, helped along by lower fees.

If you decide to investigate VCTs, I’d look for funds with a track record of dividend payments from a maturing portfolio of companies. The most established VCTs are now decades old, with proven managers.

As for EIS, more sophisticated or high net worth investors looking for tax efficient investments are often steered in this direction – perhaps by an Independent Financial Advisor.

The ability to use EIS investments to defer big capital gains tax bills can be particularly attractive to these people. But a lot of research – and potential professional advice – is a must if this is your motivation.

The tax benefits of EIS

Most retail investors look no further than VCTs when considering the next rung of tax-efficient vehicles after ISAs and pensions.

However the EIS tax breaks are undeniably attractive:

• Income tax relief. 30% income tax relief (rising to 50% for SEIS, as explained below) on a maximum investment of up to £1 million per tax year (or £2 million if into knowledge-intensive companies).
  • The income tax relief can only reduce an individual’s income tax liability to zero.

• Tax-free capital gains. The sale of EIS shares at a profit is free of capital gains tax provided you’ve held them for at least three years.

• Capital gains deferral relief or exemption. A capital gain made on the disposal of any kind of asset can be ‘deferred’ by re-investment into EIS-compliant companies. The deferred gain is then due on the sale of the EIS shares, unless the sale is to a spouse or on the death of the shareholder.

• Capital loss relief. Capital losses on EIS shares can be set against income in the year the loss arises, or the previous tax year. The benefit of this tax relief will depend on your marginal income tax rate.

• Inheritance Tax (IHT) relief. Investments in EIS-compliant shares should generally benefit from 100% relief from inheritance tax. This is provided the investment is held for two years and at the time of death. (This arises because the majority of EIS investments should qualify for Business Relief. But take specialist advice on this if needed).

Approved versus unapproved funds

If you decide to go down the EIS investment fund route, you’ll find there’s a choice between two types of funds – ‘approved’ or ‘unapproved’.

Approved funds

An approved fund’s prospectus has been reviewed by HMRC. The rules recently changed to encourage investment into knowlege-intensive companies. As I understand the guidelines, an approved fund must invest at least 50% of its assets into EIS-compliant investments within a tax year, and 90% within two years. Further, 80% of those investments must be made into knowledge-intensive companies for the fund to be an approved knowledge-intensive fund. This enables higher maximum tax relief of £2 million, and tax relief at a pre-determined date.

Such funds are very new, but they have started to appear.

Because of the deadlines on investing capital, you should be confident your chosen fund has identified its deal flow in advance.

Unapproved funds

The vast majority of EIS funds are unapproved, and investments made benefit from income tax relief.

For example, a fund manager may take up to two years to invest the fund. If they manage the timing of investment so that the fund is split equally over the two years, income tax relief is available across two tax years at 30% (as currently legislated).

Unapproved funds therefore offer greater flexibility in regard to income tax relief.

There’s a huge range of EIS funds available, and not much comment about them. One place to see what’s on offer is the WealthClub website.

Direct EIS investment

Monevator readers are likeliest to make any EIS investments by dabbling in crowdfunding via Seedrs and Crowdcube.

The minimum investment here can be as little as £10. You often get fun rewards depending on how much you put into your chosen firms, too.

Other perks include meeting company management and a nice community feel to crowdfunding events. The whole scene can be educational.

You get the same tax reliefs as if you’d invested in an EIS fund.

Set against all that, crowdfunding into unlisted companies is the Wild West of investing. Arguably few startups would chose to crowdfund if they could get venture capital backing, which implies lower-quality opportunities. It’s still relatively early days, but there have been far more failures than notable exits. Valuations are often fanciful. It’s an easy way to lose money.

I’ve chosen to invest a small single digit percentage of my net worth across dozens of EIS-qualifying startups. But this is definitely not for everyone.

Directly investing a larger sum into a single EIS-qualifying firm could be attractive if you truly understand its sector and the nature of its business.

However, if you directly invest into only one or two companies, your portfolio will lack diversification. If you’re a chunky shareholder, you may even find yourself needing to put more cash and time in further down the road to keep the business going.

Investing with an EIS fund

With an EIS fund, you should benefit from a wider exposure compared to direct investment.

Your money will be spread across a number of businesses – perhaps in different sectors and at different stages of growth.

A fund will also have deeper pockets than all but the wealthiest individuals. This means it should have the firepower to provide any extra capital if needed to unlock the value of an investment.

For these reasons, I’d suggest that unless you personally know the EIS-qualifying company – perhaps because it was started by friends, family, or work peers – that funds may be the best way to invest larger sums into EIS.

Capital preservation or capital growth

EIS funds today are focused on capital growth, either via a generalist or specialist fund.

The government took a hard line against previous capital preservation vehicles that acted against the spirit of the EIS legislation. There are now tests is in place to determine whether or not the product qualifies for EIS relief. You (or your advisors) need to be sure that any EIS fund you select is truly compliant under the government’s rules.

When investing for capital growth, a fund manager or investor seeks capital gains on an investment, typically over a four to seven-year period. In the meantime you aim to benefit from income tax reliefs on your investment in the short-term and tax-free capital gains and IHT relief in the medium to long term. There’s also that substantial loss relief should an investment fail.

The clear risk is your fund doesn’t perform over the long-term. So you need to be confident your money is going into a balanced portfolio with a high probability of a capital gain.

EIS versus Seed EIS

A last option to consider is Seed EIS (SEIS). This is like EIS on steroids, with even higher tax reliefs for investing in even younger, riskier companies.

Under SEIS, you can invest up to £100,000 in a financial year to benefit from 50% income tax relief, irrespective of your tax bracket.

The definition of an SEIS business is different from that of an EIS-compliant business:

• Seed EIS businesses are smaller (fewer than 25 employees and gross assets of less than £200,000).

• The businesses are younger (less than two years old).

A company can only raise a maximum of £150,000 from SEIS in its lifetime.

Clearly 50% upfront tax relief substantially protects the downside of a Seed EIS investment. Especially as you can claim loss relief, too, if need be.

VCTs, EIS, SEIS, or as you were?

I understand the growing interest in all these vehicles. Very high earners squeezed by the tapered annual allowances on pension contributions can’t be blamed for looking elsewhere.

My honest opinion though is most readers don’t need to get involved with any of them.

For most people, filling their ISAs and using their pension allowances every year is enough. They don’t need anything more exotic.

Upfront income tax relief is superifically very attractive. But remember the returns are likely to be low (VCTs and EIS funds) or non-existent (most direct investments you make via crowdfunding).

I’ve had a few of my crowdfunded investments go up more than tenfold, on paper. Which sounds great! But the reality is any investor in unlisted companies needs to see a few enormous winners to make up for all the duds.

If you invest via an EIS fund, you outsource this to a manager. That at least gives you a diversified portfolio, but performance seems to have been hit and miss so far. And with both EIS funds and VCTs, high fees are nailed-on.

I say ‘seems’ incidentally because good luck finding an easily decipherable comparison of EIS fund returns. This isn’t surprising, given the nature of the beast, but it’s still a big drawback. You’ll find much more trumpeting of the amount of money the funds pull in, as opposed to what they’ve paid out.

VCT returns are more widely available. They have been mediocre, but when you take into account the initial tax relief the best have not disappointed their holders.

VCTs are pretty illiquid, however, so ideally you’d be happy to bank those tax-free dividends indefinitely.

Do your research

Nobody will come a cropper punting fun money into EIS startups on Seedrs. If that’s a hobby for you, then best of luck.

As a major portion of your wealth planning though, these vehicles require a lot of thought and research. You may also benefit from financial advice. (Not to be mistaken with a sales pitch from the sector.)

Further reading:

• HMRC’s site has a section on the different Venture Capital Schemes.
• There’s also guidance on claiming EIS income tax relief.
• Notes on Enterprise Investment Schemes for firms raising money.
• WealthClub has a lot of articles on VCTs and EIS investments.

Note: I am an investor in Seedrs. We’ll both get a £50 investment credit if you follow my link to sign-up and invest £500 within 30 days.

1. I’m happy for them. Really! Look at my face. No no, that smirk is genetic.[↩]
2. You’d get £300 income tax relief on investing. Loss relief of £315 if it lasted three years. So as a 45% taxpayer you’d get £615 back of your £1,000 investment.[↩]

Six months after hitting financial independence, I’ve made good on the retire early part of the bargain.

I’ve left work.

How does it feel? Like I’ve lit the touch paper on a Catherine Wheel of emotion.

It’s euphoric, unreal, wonderful, confusing, and daunting, but in an exciting way.

I feel like I’ve been handed a precious opportunity that I mustn’t screw up. Like it’s all on me now.

No more excuses – be happy or go boil your head!

I resigned a few months ago and worked my notice until departure day last week, when I finally left work.

The end wasn’t like I imagined it would be when I first started down the road to FIRE (Financial Independence Retire Early).

My workplace was like a bucket of squabbling rats back then.

In my mind’s eye, my last day was an Apocalypse Now of burning bridges as I dropped truth-bombs from my Stratofortress of freedom.

The reality was nothing like that.

As part of a small platoon of like-minded comrades, I helped clean out the old toxic culture years ago.

Now I found myself trying not to shed a tear as my teammates gave me a send-off for which I’ll ever be thankful and which I’ll never forget.

The last few days were bittersweet like vintage chocolate. (You should know chocolate plays a central role in my life.)

I was privileged to sign-off by exchanging messages of gratitude for the many moments and kindnesses shared between a tight-knit team.

I’m going to miss them. I was lucky enough to experience a Charlie Munger-esque seamless web of trust these last few years. I may never experience that alchemy again.

The R-word

It’s hard to explain why you have to leave the tribe. I didn’t use the word retirement in talking to my (ex) colleagues, because the term is so loaded.

People think you’re going to spend all day on the golf course or snoozing in your armchair.

But that’s just not me.

So I said I’m stepping back from full-time employment and will spend my time on passion projects, family, and community.

That’s the plan and I really can’t think of a better one.

A couple of astute fellows clocked it straight away and asked me outright: “Are you retiring?”

I admitted that I was and took the “You jammy bast!” ribbing as a double-thumbs-up.

But whether we discussed the R-word or not, everyone understood my reasoning. It’s no secret that we’ve all been collared by The Man; breaking his grip seems to be a universal goal.

Nobody asked me for the secret cage-dissolving sauce, though.

What now?

Despite the emotional whirl, the moment I sent my resignation email was the moment the work-related stress drained away. I have felt a profound sense of ease about my decision ever since.

You can’t grow if you want things to stay the same, so FIRE or not, it was time for me to make a change.

We all experience decisive breaks in our lives: leaving home, first job, ending a relationship, changing career, or country.

The end of each era forms the strata of our lives. As I take a moment to drill down into my past, it’s clear that every stage contributed something to the core, and that each is a mixed bag of bones.

Anyway, I don’t want to get too sedimental but whatever happens next will be down to me. It won’t reflect on the concept of FIRE.

I could easily be overwhelmed by misfortune like Living A FI, but hopefully I’ll be as happy as Jacob.

It helps that I’ve put some time into thinking about what makes me tick.

What motivates me

• Deep human connection.
• Being part of a cause that does some good.
• Personal progress – feeling like I’m a better human than I was yesterday.
• Simple pleasures – we took to the hills on day one, built a campfire, and watched our cares fade like embers in the darkness.
• Some work (that I choose) and lots of play (there’s still a fun-loving boy in here who wants to know everything about the world).
• The ongoing love of Mrs Accumulator – without which it would all seem completely pointless.

What doesn’t motivate me (much)

• Money – beyond what I need to live.
• Personal politics – one-upmanship, egotism, alpha dog BS.
• Status – eventually we’re all stripped of the trappings: wealth, power, fame, and social approval. You’ll be naked, weak, insignificant, and close to the end. The only thing that will matter is the kindness of others and the love of those whose lives you touched. Choose your circle wisely.

On FIRE

I’m less than a week into FIRE as I write this. I fully admit this is not the new reality. This is holiday mode.

I’m on an amazing trip that’s fired up my brain with the joyful possibilities.

At some stage, that flame will die back down and I’ll go back to operating on a lower burn. But for now, I’m enjoying the gas.

Take it steady,

The Accumulator

Pro-tip: a member of the family wisely advised me to start retirement in the spring. There is no doubt that the optimism of longer nights and sunnier days has helped get me off to a great start. Read more about my decumulation plan if this sounds like something that would work for you.

What caught my eye this week.

Competition to work for one of the bulge bracket investment banks is always fierce.

Young graduates from the best universities around the world compete for the chance to make millions in the markets.

Indeed, many onlookers – myself included – have lamented this brain drain. Finance takes too many clever people away from science and engineering.

So it’s especially galling that all that striving for academic achievement and going toe-to-toe in grueling interviews wasn’t enough stop bankers at some of these big institutions losing billions of dollars in the past fortnight.

Several investment banks had enabled an obscure family office, Archegos, to leverage up its $10 billion portfolio until it reportedly had more than $50 billion in exposure to just a handful of companies.

Which was a nice little earner, until the music stopped – like it always does.

When share prices began to fall, Archegos needed to stump up more money that it didn’t have to meet its margin calls.

This meant forced selling, and plunging share prices of the companies Archegos held:

Which was a problem for the banks.

You know what they say: when you owe the bank £10,000 you have a problem. When you owe the bank £1 million the bank has a problem.

Well, when you owe the banks tens of billions, everyone has a problem.

A billion here, a billion there

The Archegos SNAFU unwound like the finale of the criminally under-watched movie Margin Call:

According to the Financial Times [search result]:

…before the troubles at the family office burst into public view at the end of the week, representatives from its trading partners Goldman Sachs, Morgan Stanley, Credit Suisse, UBS and Nomura held a meeting with Archegos to discuss an orderly wind-down of troubled trades.

The banks had each allowed Archegos to take on billions of dollars of exposure to volatile equities through swaps contracts, and Hwang was struggling to deal with margin calls triggered by a plunge in ViacomCBS shares.

An orderly wind-down would minimise the market impact and the hit to their own balance sheets as they worked to sell down stakes in companies that Archegos had amassed through the derivatives instruments.

It is unclear whether an understanding was reached but several sources said it was quickly clear that some banks had begun selling to stem their own losses. People familiar with the trading said Credit Suisse and Morgan Stanley both appeared to have unloaded small batches of shares in the market after the meeting.

“It was like a game of chicken,” one person said.

By Friday morning, any hopes of co-ordination had been snuffed out and the floodgates opened when Goldman began pitching global investors on billions of dollars of Archegos-linked stocks.

Morgan Stanley joined hours later, and the two sold roughly $19bn in big block trades that day alone, according to the people.

That was probably painful for those US banks, but not as much as for (European) Credit Suisse and (Japanese) Nomura.

The two non-US banks dragged their feet. Perhaps they are less familiar with the ruthlessness of Wall Street banks than are, um, Wall Street bankers.

Nomura says it may have lost as much as $2bn on the trades. Credit Suisse has reportedly lost between $3 billion and $4 billion.

And people said the Reddit traders had issues…

Marginalia

Some readers – even my co-blogger – often question how I can be so arrogant as to invest actively when I’m up against the smartest financial minds on the planet.

And it’s true, we all know the evidence shows that most active investors would be better off as passive investors.

But I’ve seen very little over the years to suggest this doesn’t equally apply to The Smartest Financial Minds On The Planet.

Perhaps I’ll just point them towards this article in the future.

As for the investment bank recruiters, maybe they should ask to see an applicant’s Netflix viewing record alongside their C.V.?

Viewing Margin Call should be mandatory.

Then again, the banks probably would have facilitated the trades anyway.

As Bloomberg notes:

…global banks embraced [Archegos founder Bill Hwang] as a lucrative customer, despite a record of insider trading and attempted market manipulation that drove him out of the hedge fund business a decade ago.

Sure, why not enable tens of billions of dollars in leveraged exposure with that guy? Bankers gotta bank!

And to think I struggled to get a mortgage.

p.s. I’m out with Weekend Reading early this week so I can spend a few days in various local gardens. Have a great Easter weekend everyone!

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