Knowledge-intensive approved EIS funds: what could they mean for investors?
Archived article: please remember tax and investment rules and circumstances can change over time. This article reflects our views at the time of publication.
What are knowledge-intensive approved EIS funds?
Knowledge-intensive approved EIS funds could make tax planning easier for experienced investors and potentially help them receive EIS income tax relief earlier.
For a fund to qualify as a knowledge-intensive (“KI” for short) approved EIS fund, it needs to meet specific conditions set out by HMRC – mainly that 80% of its investments need to be in “knowledge-intensive” companies. Broadly speaking, these are companies carrying out research, development or innovation at the time of the investment.
Please note: tax rules can change and benefits depend on circumstances. To maintain KI approved status, the fund needs to comply with requirements set out by HMRC. Should the fund fail to do so, it will impact investor tax relief.
How could KI approved EIS funds make tax planning easier?
When you invest in a KI approved EIS fund, the investment date for income tax purposes is the date the fund closes.
So, for instance, if you invest in any of the KI funds currently open, you should be able to claim income tax relief for the current tax year or get back tax you’ve already paid for 2021/22.
Please note: you may have to wait up to 24 months to receive the EIS certificate to make the claim. However, you would only receive a single EIS5 certificate, instead of individual EIS3 certificates (one for each company the fund invests in), as is the case with conventional EIS funds, see more below.
Available KI approved EIS funds
|Our choiceMercia Knowledge-Intensive EIS Fund||2.5x||28 Mar 2023|
|Our choiceOctopus Ventures Knowledge Intensive EIS Fund||10x||5 Apr 2023|
|Calculus Knowledge-Intensive EIS Fund||2x||5 Apr 2023|
|Downing Healthcare Impact EIS Knowledge-Intensive Fund||3x||5 Apr 2023|
|Par Knowledge-Intensive EIS Fund||15% IRR||31 Mar 2023|
*Information correct as at Friday, 24 Feb 2023
How are KI approved EIS funds different from other EIS funds?
Besides the requirement to invest largely in knowledge-intensive companies, the main difference is the structure of the fund and its implication for the timing of income tax relief.
When you invest in a conventional EIS fund, the tax year(s) in which income tax relief can be applied will depend on when the capital is deployed.
It is common, for instance, for EIS funds to target deployment over a period of 12-18 months. So, even if you invest in the current tax year, the investment date may fall in the next tax year.
For both kinds of funds, the CGT and IHT tax benefits are linked to the date the money is invested in the underlying companies. Read more on EIS tax relief »
What about EIS certificates?
To claim tax relief, investors will need to receive EIS certificates first – this is true of both KI approved and conventional EIS funds.
However, there is a difference.
With KI approved funds, a single EIS5 certificate is expected to be issued after the fund has invested 90% of its capital, which it is required to do within 24 months of the close. Upon receipt of the certificate, investors can claim tax relief.
With conventional EIS funds, instead, individual EIS3 certificates are typically issued for each company in which the fund invests – usually some time (a few weeks or months) after the capital has been deployed, depending on the EIS provider.
Where do KI approved EIS funds invest?
As mentioned, to obtain approval, 80% of a fund’s capital needs to be invested in the shares of companies that were knowledge-intensive at the time the shares were issued.
The knowledge-intensive definition applies to a wide range of companies in a multitude of sectors – the actual companies selected will depend on the investment strategy of the individual fund.
Most KI funds seek to apply the same investment strategy and invest in the same type of company as their conventional funds. As an example, the managers of a featured knowledge intensive EIS fund - Octopus Ventures, have backed four unicorns (private tech companies valued at more than $1 billion) in its wider portfolio. Octopus Ventures’s Knowledge Intensive EIS Fund apply a similar strategy to its conventional EIS fund and seeks to build on its experience as backers of early-stage technology companies. Please remember, past performance is not a guide to the future and EIS investments are in young companies that can and do fail.
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