How are KI EIS funds different?
The differences between standard EIS and KI EIS funds lie within the fund structure and also when tax reliefs are available. A KI EIS fund is a closed-ended fund and will have a close date, usually at the end of the tax year. Put simply, KI EIS funds and standard EIS funds differ primarily in their investment focus, eligibility criteria, and the types of companies they target.
For standard EIS funds, the issue of eligibility is rather broad. Companies are still required to meet criteria around their size, age and structure but they are not required to be involved in KI activities.
Conversely, KI funds are more stringent, and companies looking for this type of investment need to be concerned with requirements related to innovation, intellectual property ownership, and the proportion of operating expenses spent on research and development activities.
For KI funds, 80 per cent of the portfolio needs to be in companies involved in research and development or innovation. This usually means that there are greater operating costs and slightly more protracted development cycles as a result of their work in R&D.
Type of investment
While standard EIS funds usually invest in a variety of early-stage businesses across a number of sectors, KI funds specifically target companies engaged in activities that require a high level of knowledge or intellectual capital. These may include sectors such as technology, life sciences, engineering or advanced manufacturing.
The focus is on companies with innovative products, processes or services that demonstrate a significant level of intellectual property. Standard EIS funds on the other hand will not necessarily require businesses to meet specific criteria related to innovation or intellectual property.
Where the funds are similar, however, is in their tax relief. Investors in both funds can benefit from various tax incentives offered by the EIS, including income tax relief, CGT deferral, and exemption from CGT on investments held for a certain period.
Although the EIS is often a small part of an investor’s portfolio management, it can generate outsized returns that can help with overall portfolio performance.
Impact of combined EIS reliefs
Take the example of a client selling a buy-to-let property with a £100,000 gain. If invested into an EIS, this gain not only results in £30,000 initial income tax relief but a deferral of the £28,000 CGT liability. This liability can be deferred indefinitely by reinvesting future proceeds back into EIS investments – gaining 30 per cent initial tax relief on each reinvestment.
On the death of the client, CGT is not continued. Given EIS investments are inheritance tax-free, this investment has therefore potentially benefited from 30 per cent initial tax relief, 28 per cent CGT, and 40 per cent IHT – a combined tax benefit of 98 per cent.
