The EIS market may have proved a great success but it is still built around a surprisingly small number of investors. David Lovell argues it could - and indeed should - be many times larger
As the self-assessment deadline has just passed for several million UK taxpayers, there remains a lamentable level of coverage about the benefits of the government-endorsed Enterprise Investment Scheme (EIS) in the mainstream media. Consequently the tax advantages of EIS and Seed EIS investments are being enjoyed by just a small fraction of the UK investor population.
In this current environment of historically low interest rates, coupled with the recent changes to pension caps, it is a staggering statistic that there could be as few as 30,000 investors actively taking advantage of these benefits.
They may have a higher risk profile but a programme of education and promotion could result in EIS investments becoming a much more commonplace holding in affluent investor portfolios.
The EIS scheme has been a great success since its inception, and has raised more than £14.2bn of funds for more than 24,620 companies. HMRC statistics released in October 2016 reported a record year of £1.812bn raised for 3,264 companies.
Whilst the rules for EIS qualification continue to be tweaked and adapted, the expectation is this year will see a similar or even larger sum raised - notwithstanding concerns around possible capacity and product availability.
Dig a little deeper into those same statistics, however, and there are a few surprises - for example, this record sum was raised via only 145,765 individual subscriptions.
This number does not of course reflect the total number of investors as it will not take into account individuals who are making multiple investments. Still, this can be identified by looking at claims for each tax year in the self-assessment tax returns. While provisional at present, the 29,380 number for 2014/15 is broadly in line with previous years - for example, 21,835 in 2012.
A closer look at the breakdown of the size of each investor's overall EIS investment suggests the recent increase in the maximum annual investment level from £500,000 to £1m has had a positive effect, with 17% of all EIS investment coming in this higher band - and that amount from less than 2% of the investors. Given the relatively small numbers, however, one could also conclude there are a lot of higher net worth investors not taking up the tax advantages.
But while there has been an overall increase in numbers, driven partly by the growth of crowdfunding platforms, there are more than 250,000 people in the UK earning £250,000 or more per annum - and almost 350,000 earning more than £150,000 per annum, amongst the UK's 4.9 million higher-rate taxpayers.
Given these significant numbers, one cannot help but think that investments with 30% income tax relief, further loss relief, and an unlimited capital gains limit on the upside, should form an attractive option to many more than 30,000, 40,000 or even 50,000 investors each year.
A million EIS investors?
So how wide could the EIS marketplace conceivably be? Well, one could look to the 4.9 million higher tax earners, or to the 347,000 earning more than £150,000, many of whom will be affected by the new lower Lifetime Allowance pension cap of £1m. This, however, is perhaps only to look at one aspect of EIS investing -the tax advantages provided and sponsored by the government.
Yet this does not take into account the draw and excitement of earlier-stage growth investing and the search for returns in a low interest rate environment, which is behind the near exponential growth of alternative investment platforms. Indeed, for a better indication of the potential market, it is perhaps instructive to look to the 1.09 million investors who, according to Nesta, used alternative investments platforms in 2015.
If both financial advisers and the mainstream media were to get behind the EIS, the potential marketplace could be at least 10 times the current 30,000 established investors - and one million EIS investors should not be viewed as an unrealistic target for the sector.
David Lovell is operations director of alternative investment platform GrowthInvest
'Can help iron out rough edges'
How do mergers affect investors?
Our video series continues
Three advisers have their say…
Regulator's data bulletin