Why EIS should receive serious attention from high net worth individuals * ....
The tax treatment of the EIS significantly skews the risk return dynamics in favour of any higher income tax payer and thus deserves serious attention in portfolios and estate planning.
Furthermore, given the downside protection and tax free upside, there is a strong logic for only investing in those risky, but potentially high return, assets that qualify for EIS.
Consider a simple example of a higher income tax payer who invests £1 each in 5 EIS companies hoping for a 5x return in each case. Assume a pessimistic scenario, namely that four fail and one returns 5x.
Initial investment: 5 * £1 = £5
Initial tax refund: 5 * £0.3 = £1.5
Write off of failed investments against income tax 4 * £0.7 * 45% = £1.26
Tax free return from successful investment £5
Initial outlay £5 - £1.5 = £3.5
Total return £1.26 + £5 = £6.26
Even this pessimistic scenario would generate a net tax free gain of £2.76 or 79%. This translates to a 15% annual tax free return if one assumes a 4 year holding period. A higher success rate of two successful exits each yielding 5x would generate returns of over 200%
We would suggest that a 80% failure rate is overly high. With our filtering methodology we would be aiming for a significantly higher success rate.
* This is a theoretical example and does not constitute investment or tax advice. All individuals must seek independent tax and investment advice. For full details of the EIS