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Will your clients be able to purchase EIS-qualifying shares before the end of this tax year?

Government rule changes mean there will be no more EIS investments in Reserve Power from 30th November 2015. Will another asset class be able to fill the void, or will clients who normally make their EIS investments at the end of the tax year need to start planning sooner?

This blog is intended for professional advisers and wealth managers only.

The EIS industry has developed a consistent and predictable rhythm in recent years. At the beginning of each February, clients turn their attention to tax planning, seeking to mitigate the Income Tax and CGT bills they have just paid for the previous tax year. A mad rush ensues, as clients seek out opportunities to buy EIS-qualifying investments before 5th April, allowing them to carry back their tax reliefs to the preceding tax year.

In the past, many of these clients have managed to find a home for their money, mainly thanks to EIS investments in companies that own and operate power generating assets. These investments have typically been regarded as being at the lower end of the EIS risk spectrum, because of the residual value of the underlying assets and because revenues are often secured through long-term contracts.

First Solar Power and then Anaerobic Digestion attracted a major share of the EIS market, in large part because providers were able to get investors’ cash into EIS-qualifying shares at short notice. There was plenty of capacity to go around, with all of the major EIS providers offering renewable energy tranches designed to help clients invest before the end of the tax year.

After the Government brought in rule changes to prevent the combination of EIS investment with renewable energy, providers including Oxford Capital began to offer EIS investments in Reserve Power – small-scale power generating companies that can revenues, including long-term contracted income, in return for boosting the UK’s electricity supply at times of peak demand (see our briefing paper for more information).

There was an expectation that Reserve Power EISs could fill the void left by renewable energy at the end of the 15/16 tax year. But on 22nd October 2015 the Government announced that it was specifically excluding Reserve Power companies from benefiting from EIS reliefs. The change is effective from 30th November 2015.

So, if clients decide to wait until February or March next year to organise their EIS investments, where can they put their money?

The truth is, it is hard to know. Reserve Power certainly won’t be an option. And the Government’s reasons for putting a stop to Reserve Power investments imply that many other asset-backed EISs offering long-term revenues could become a thing of the past.

EIS rule changes, announced in the Summer Budget and coming into force in mid-November, will further limit the opportunity for EISs that have historically been able to rapidly invest client funds into qualifying shares. It will no longer be possible to invest funds raised through EIS into assets which are already operational. And EIS companies will have to satisfy HMRC that the funds they raise will be used for genuine growth and development – the EIS industry is still awaiting guidance on exactly what this requirement will mean.

Whatever happens, it is unlikely that a large EIS opportunity, comparable to the renewable energy or power generating EISs of the past, will continue to be available after 30th November. It seems more probable that EIS providers will begin to offer smaller tranches of investment into specific opportunities. This could make the EIS landscape harder for advisers and clients to navigate, and the best EIS opportunities are likely to be heavily oversubscribed as the tax year-end approaches.

At this stage, there seem to be only two certainties.

Firstly, Government support for Venture Capital-based EIS investment, like the Oxford Capital Growth EIS, remains strong. But typically these sorts of EISs cannot invest money at short notice, making them a less appropriate choice for clients whose main motivation is the acquisition of EIS shares before the tax year end.

Secondly, there remains a brief window of opportunity to invest in Reserve Power EISs before the 30th November. At the time of writing, the Oxford Capital Infrastructure EIS has up to £15m capacity for investment into Reserve Power companies that have already received HMRC Advanced Assurance of EIS-qualification. For clients interested in EISs that can rapidly invest in qualifying shares, particularly clients looking to carry back reliefs to the 14/15 tax year, November could be the new March.