The illiquidity risk must be recognised and accepted by the Investor, as EIS investment is in early-stage unquoted companies there is a very restricted market for the sale of qualifying shares outside of typical exit strategies explored in section 13. Due to the illiquid nature of the investment, investors should only consider subscribing an amount which would not materially affect their quality life or which they would be required to liquidate in case of an emergency. Investors should keep monies in cash or readily realisable securities alongside their qualifying investment.
Past performance of investee companies is fairly limited compared to large established or quoted companies as they may not even have a trading history. As this can be the case when the Investment Adviser is considering a company for investment, the due diligence is rather subjective as each Fund has differing target criteria and their own idea of what makes a successful business.
The past performance of a fund which has made similar EIS investments should be considered when assessing if EIS investment is correct for you. In saying that, there should not be a reliance or an expectation for a fund to replicate their past performance. Past performance is not indicative of the future performance of the Fund many factors must be considered when assessing your suitability if you are in doubt of the relevance of EIS to your investment portfolio you should consult an Independent Financial Adviser ("IFA").
- Guarantee / Forward-looking statements risk
The financial promotions distributed for enticing investors must follow a very strict code of conduct, explicitly outlining the restriction on guarantees. No fund or IFA is in a position to guarantee any investor the safety or return of their capital and all investments carry a certain degree of risk. EIS investments being in early-stage companies means that many of these companies fail and investors must be acute to this likelihood.
All forward-looking statements within financial promotion will all be based upon an individual's opinions, and as such, there can be no guarantee or assurance that predictions of the Fund or its Adviser come to fruition.
The tax risk associated with investing in EIS is rather intricate for the average Investor, and it is suggested that anyone considering an EIS qualifying investment should consult a specialist tax advisor to assess the Investor's tax liability and suitability for an investment in such schemes.
There is an additional risk for ill-informed investors when considering selling their shares within the three-year qualifying period. The premature sale of the shares has consequences for the reliefs to the Investor; the upfront income tax relief is clawed back by HMRC alongside any capital gain which may have been deferred by the qualifying investment as well the liability for capital gain incurred through the sale of the shares. Given the knock-on consequences of selling the qualifying shares inside the three years, it would require specific advice on the sale of the shares by an adviser aware of the full repercussions.
Business Relief is assessed by HMRC after the Investor's death, so there is no guarantee that investments made through EIS Portfolio will qualify for 100% relief from Inheritance Tax. Any potential for an investment in a portfolio company to qualify for Business Relief ceases when that company is sold or listed on a stock exchange (although a company listed on the Alternative Investment Market may still qualify for Business Relief, subject to meeting several other criteria)
- No guarantee of retaining reliefs risk
As advance assurance is given on the condition of the qualifying company maintaining their qualifying status, there can be no guarantee that the company will remain compliant. The assurance is initially given on the company's conditions outline to HMRC in their application and is only given on the presumption that everything within the application is true and has not been structured to qualify for the scheme.
As such, if the qualifying company chooses to carry out any disqualifying actions, the Investor's tax liability will undoubtedly be affected and should be advised accordingly by an IFA.