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.
Knowledge-intensive approved EIS funds received the final go-ahead from the Chancellor in March 2020. They could make tax planning easier for EIS investors by giving a set investment date for tax purposes and a single EIS5 certificate.
What are knowledge-intensive approved EIS funds?
To obtain approval from HMRC, a knowledge-intensive (“KI” in short) approved EIS fund needs to meet specific conditions – mainly that 80% of its investments need to be in “knowledge-intensive” companies. Broadly speaking, these are companies that are carrying out research, development or innovation at the time of the investment.
Provided it meets the conditions set out by HMRC, a KI approved EIS fund could make tax planning easier for experienced investors and potentially help them receive EIS income tax relief earlier.
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.
In other words, you know at the point of investment that you should be able to use the income tax relief in the tax year in which you invest or carry back to the previous tax year – effectively getting back tax you’ve already paid. You may however have to wait up to 24 months to receive the EIS certificate to make the claim.
Available KI approved EIS funds
There are currently no KI approved EIS funds open for investment. If you are interested, please register below and we'll send you an alert as soon as an offer becomes available, which may not be until later on in the year.
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) to 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, thereby limiting carry back options.
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 investee company in which the fund invests – usually within a few weeks or months from the capital being 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.
Both of our previously featured KI approved EIS funds, MMC Knowledge Intensive Approved EIS Fund and Parkwalk EIS Knowledge Intensive Fund (now closed) seek to apply the same investment strategy and invest in the same type of company as their longstanding flagship funds – MMC Ventures EIS and Parkwalk Opportunities EIS respectively.
MMC Ventures has been investing in technology companies for over 20 years, whilst Parkwalk Advisors specialises in spinouts from leading universities (mainly Cambridge, Oxford, Bristol and Imperial College). Investors in their respective KI approved EIS funds can expect a similar investment strategy.
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