Here’s what you need to know
From 6 April 2018, the amount of money investors are allowed to put into Enterprise Investment Schemes (EIS) will double to £2 million, provided at least £1 million is invested in “knowledge intensive” companies.
In addition, “knowledge intensive” companies will be able to receive up to £10 million in EIS funding in a year, up from £5 million.
Rules have also been relaxed so in some cases it will be possible to invest in companies which have been trading for more than 10 years (the current requirement for knowledge intensive companies).
Alex Davies, CEO and Founder of Wealth Club, comments on the benefits of the rule change: “The latest EIS rule changes are a welcome move from the government. It sees value in knowledge intensive companies because of the volume and quality of jobs they create and the wealth they produce for the country. At the same time, it recognises developing innovation is very costly and time-sapping for companies, and so this increased funding allowance will be a good boost for them. This should give any company with a great idea a real chance to turn it into a commercial success and potentially reward early investors with very high returns.”
What are ‘knowledge intensive’ companies?
Broadly speaking, the expression refers to young and innovative businesses, such as a a company which is developing a new drug or treatment.
There are specific requirements from HMRC that a company must meet to be categorised as ‘knowledge intensive’:
Operating costs condition – When it issues shares the company must have spent:
- at least 15% of its operating costs on research and development or innovation in one or more of the previous three years (or in the three years following investment for a new company); OR
- at least 10% of its operating costs on research and development or innovation in each of the previous three years (or in the three years following investment for a new company).
Skilled employee or innovation condition:
- The skilled employee condition is very strict and only rarely met in reality. To pass the test, at least 20% of a company’s employees must hold postgraduate degrees in a subject relevant to their job and must be engaged in research and development;
- The ‘innovation’ condition requires a company to be creating or have recently created intellectual property, that it will use for its main business activities; This is broader and means a wide variety of companies could qualify. Scientific companies are probably the first that spring to mind but are not the only ones. A cartoon character created by an animation company could well be that company’s protected intellectual property. So, could a piece of software, an app, or a machinery component.
Why invest in knowledge intensive EIS?
When you invest in knowledge intensive firm, some of the firms you choose could potentially be world beating firms. Pick the right ones and you could see very high returns.
Of course, investing in all young businesses can be risky. And for this reason, there are some very attractive tax benefits to encourage you both to invest in the first place and also to help soften the blow if the businesses you invest in don’t go to plan:
- Up to 30% income tax bill savings – up to £300,000 per year
- Tax-free growth
- Defer capital gains liability from other investments – potentially indefinitely
- Offset any future losses against your income, saving on income tax
- Pass on investments free of inheritance tax
How can I invest in knowledge intensive companies through an EIS?
Probably the best way to get access to knowledge intensive EIS investments is to invest through an EIS portfolio that specialises in this area.