As tax year end looms, KI EIS funds may offer a tax-planning advantage
Don't invest unless you’re prepared to lose all the money you invest. This is a high-risk investment and you are unlikely to be protected if something goes wrong. Take 2 mins to learn more.
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Due to the potential for losses, the Financial Conduct Authority (FCA) considers this investment to be high risk.
What are the key risks?
- You could lose all the money you invest
- If the business you invest in fails, you are likely to lose 100% of the money you invested. Most start-up businesses fail.
- You are unlikely to be protected if something goes wrong
- Protection from the Financial Services Compensation Scheme (FSCS), in relation to claims against failed regulated firms, does not cover poor investment performance. Try the FSCS investment protection checker here.
- Protection from the Financial Ombudsman Service (FOS) does not cover poor investment performance. If you have a complaint against an FCA-regulated firm, FOS may be able to consider it. Learn more about FOS protection here.
- You won’t get your money back quickly
- Even if the business you invest in is successful, it may take several years to get your money back. You are unlikely to be able to sell your investment early.
- The most likely way to get your money back is if the business is bought by another business or lists its shares on an exchange such as the London Stock Exchange. These events are not common.
- If you are investing in a start-up business, you should not expect to get your money back through dividends. Start-up businesses rarely pay these.
- Don’t put all your eggs in one basket
- Putting all your money into a single business or type of investment for example, is risky. Spreading your money across different investments makes you less dependent on any one to do well.
- A good rule of thumb is not to invest more than 10% of your money in high-risk investments.
- The value of your investment can be reduced
- The percentage of the business that you own will decrease if the business issues more shares. This could mean that the value of your investment reduces, depending on how much the business grows. Most start-up businesses issue multiple rounds of shares.
- These new shares could have additional rights that your shares don’t have, such as the right to receive a fixed dividend, which could further reduce your chances of getting a return on your investment.
If you are interested in learning more about how to protect yourself, visit the FCA’s website here.
As the end of the tax year approaches, experienced investors may look for ways to reduce their tax bills. One option could be investing in a knowledge-intensive approved EIS fund – a KI EIS fund in short.
KI EIS funds back what HMRC deems “knowledge-intensive companies”: young and ambitious (hence high-risk) companies, typically carrying out research, development or innovation.
To somewhat compensate for the risk, KI EIS funds offer generous tax reliefs, the same as other EIS funds. When you invest, you could qualify for up to 30% income tax relief, tax-free growth, deferral on capital gains made elsewhere, loss relief and inheritance tax relief.
Tax rules can change and benefits depend on circumstances.
However, compared with regular EIS funds, KI EIS funds have the advantage of making tax planning easier.
What are KI funds? How could they make tax planning easier? What kind of companies do they invest in? Read on to find out.
Important: The information on this website is for experienced investors. It is not a personal recommendation to invest. If you’re unsure, please seek advice. These investments are for the long term. They are high risk and can fall as well as rise in value: you could lose all the money you invest. Tax rules can change and benefits depend on circumstances.
What is the tax-planning advantage?
Whilst both KI and conventional EIS funds are eligible for the same set of tax reliefs, KI funds offer some practical advantages, which could make tax planning easier.
| KI EIS funds | Conventional EIS funds | |
|---|---|---|
| Against which tax year can I claim income tax relief? | Same tax year the fund closes, plus option to carry back to the previous tax year.* | It depends on the speed of deployment. You can claim tax relief in the year when each individual investment is made or carry back to the previous year. |
| What EIS certificate(s) will I get? | A single EIS5 certificate. | Multiple EIS3 certificates – one for each of the companies in which the fund has invested. |
| When will I get the EIS certificate(s) to claim tax relief? | After the fund has invested 90% of its capital, which it is required to do within 24 months of the close. | After the fund deploys your capital and each company is authorised by HMRC. Depending on the fund, this could vary from a few weeks to over a year. |
* For capital gains tax deferral and inheritance tax relief the investment date is when the capital is invested in each company, not the fund close date.
What kind of companies do Knowledge Intensive EIS Funds invest in?
Broadly speaking, HMRC classes EIS companies “knowledge-intensive” if they invest in Research & Development (R&D), employ a certain proportion of skilled employees or develop new intellectual property. Examples could be companies creating deep tech or new medicines.
With knowledge-intensive companies, the potential for growth may be high – but so is the investment risk, due to the typically longer development cycles and higher operating costs.
Below we show example businesses from current KI funds. They are outlined to give a flavour of the types of companies you might expect but are unlikely to be part of a new investor's portfolio.
Example of a successful exit
PetMedix – Parkwalk Knowledge Intensive EIS Fund
The first major EIS fund manager to launch a KI EIS Fund was university spinout specialist investor Parkwalk Advisors, in 2021.
Parkwalk also went on to achieve one of the first successful exits for a KI EIS fund with PetMedix, a company developing antibody treatments for diseases in dogs and cats. Cambridge-based PetMedix was set up in 2017 to build on the founders’ 30+ years of antibody research and innovation. In 2023, PetMedix was acquired by animal health giant Zoetis. This returned £24 million to PetMedix’s largest shareholder Parkwalk (a multiple of 1.5–8x) including tax reliefs and deferred proceeds. Parkwalk had supported the company through two funding rounds since 2019. Past performance is not a guide to the future.
Parkwalk Knowledge Intensive EIS Fund IV is open for investment and closes this tax year – you can view more details below.
Investment example
Optalitix – Calculus KI EIS Fund
Founded in 2013 by software entrepreneur Jon Shapiro and actuary Dani Katz, Optalitix’s low code software converts spreadsheets into apps.
Its products are used by clients in financial services to automate processes such as insurance pricing and underwriting or managing investment portfolios. Optalitix has partnerships with the likes of Lloyd’s Lab, PwC, Go.Compare, and First Street.
Calculus led a £2.3 million funding round in September 2024, with the Calculus KI EIS Fund investing £198,000. The investment is expected to go towards accelerating product innovation and supporting expansion plans.
Calculus KI EIS Fund is open for investment and closes this tax year – you can view more details below.
Investment example
Kinomica – Mercia Knowledge Intensive EIS fund
Founded in 2016, Kinomica is a precision medicine and cancer diagnosis business whose products support clinical decision making.
Kinomica’s diagnostic platform, KScan, aims to help clinicians prescribe the right drug, for the right patient, at the right time. The company’s initial focus is on developing diagnostic tests to predict how a patient will respond to front-line therapies for liver cancer and leukaemia.
The Mercia Knowledge Intensive EIS fund invested £925,000 in the business in August 2024 alongside the British Growth Fund and Longwall Ventures as part of a £3.6 million round.
Mercia Knowledge Intensive EIS fund is open for investment and closes this tax year – you can view more details below.
See performance of Parkwalk EIS funds
Performance of Parkwalk EIS funds per £100 invested in each tax year
Source: Parkwalk, as at December 2024. Past performance is not a guide to future performance. The chart shows realised returns (where share proceeds have been returned to investors as cash) and unrealised returns (where cash has not yet been returned and the value of the investments is based on the manager’s own valuation methodology). There is no ready market for unlisted shares. The figures shown are net of all fees and do not include any income tax relief or loss relief.
Wealth Club aims to make it easier for experienced investors to find information on – and apply for – investments. You should base your investment decision on the offer documents and ensure you have read and fully understand them before investing. The information on this webpage is a marketing communication. It is not advice or a personal or research recommendation to buy any of the investments mentioned, nor does it include any opinion as to the present or future value or price of these investments. It does not satisfy legal requirements promoting investment research independence and is thus not subject to prohibitions on dealing ahead of its dissemination.
Alex Davies
Chief Executive
Alex was a board director at Hargreaves Lansdown, where he worked for 15 years. He was responsible for building Hargreaves Lansdown into the biggest direct-to-consumer SIPP provider in the UK with more than 150,000 clients and over £12 billion under management. He is a keen investor with a portfolio of shares, funds, student property, EIS and VCT investments.