By Francesca Rayneau, Director at Calculus
Enterprise Investment Schemes (EISs) are a powerful way for clients, who are comfortable with the risks, to target high growth investments. For a company to qualify for EIS funding it must be early stage and not listed on the main market of the London Stock Exchange. These companies often have the potential to grow much faster than their larger, listed counterparts, providing investors with a unique opportunity to participate and benefit in their growth journey. Investors regularly choose an EIS Fund structure, so they have a portfolio of EIS qualifying companies, sometimes in various sectors, to mitigate some of the risk involved in early-stage investing.
Focusing specifically on Knowledge Intensive EIS Funds (or approved funds as they are also referred to by), 80% of the portfolio needs to be in companies involved in research and development (R&D) or innovation, playing a pivotal role in advancing technology and healthcare solutions. Knowledge Intensive companies typically have higher operating costs and longer development cycles due to the nature of their work in R&D. Recognising this, the UK government offers enhanced benefits under the EIS for investments in these companies. This includes higher investment limits and extended periods for companies to meet qualifying conditions.
So, what are the benefits on offer for investors?
- KI EIS Funds make tax planning a lot easier: The investment date for income tax relief purposes is the date the fund closes. This means investors know they can receive all their income tax relief in the tax year the investment is made (or under current EIS regulation, can carry back to the previous tax year). It is also a lot simpler as investors receive a single EIS5 certificate, instead of individual EIS3 certificates (one for each company the fund invests in). However, it is important to note that this EIS5 certificate is not issued upfront. The fund manager still must deploy the capital raised and only when the fund is 90% deployed, can it apply for the EIS5 certificates to be issued by HMRC.
If you are reading this article, then the chances are you are already familiar with the substantial tax benefits on offer. Investors can claim 30% income tax relief on investments up £2 million for Knowledge Intensive funds, potentially reducing their income tax bill substantially. In addition, EIS investments offer Capital Gains Tax (CGT) deferral, and the gains are CGT free, inheritance tax (IHT) relief after two years, and loss relief, which can be offset against income tax.
- High growth potential: KI EIS funds invest in small early-stage businesses with high growth potential, particularly in sectors like technology and healthcare. These investments offer the chance to be part of exciting growth stories, with the potential for significant financial returns. However, they are not suitable for every investor, as they require more advanced knowledge and risk appetite. The key is to match up risk appetite and interest with the manager’s investment strategy and sector specialism. Track record is, of course, key. Exits are the holy grail – the way a manager can prove their investment strategy is to show they have successfully grown and sold a company.
- Support for innovative UK companies: In the recent spring budget, the Chancellor continued to show his passion and understanding of UK start-ups and their role in rejuvenating the UK economy. This sentiment was further reinforced by the introduction of the new British ISA, carrying all the same tax benefits as the existing ISA system, and encouraging more people to invest in UK assets. The November Autumn Statement saw the Chancellor extend a sunset clause for EISs to 2035. Initially set to expire in April 2025, this extension alleviates the uncertainty that has surrounding EISs. This announcement not only secures the future of the schemes but also reinforces their role as a vital component in the funding ecosystem for UK start-ups. For investors, this means a more confident environment to invest, combining the potential for attractive returns with significant tax advantages, and the opportunity to be part of the UK’s thriving innovative and entrepreneurial spirit.
By investing in a KI EIS, clients are gaining access to the companies driving the UKs ability to grow as a global R&D powerhouse.
