We asked tax expert Chris Lee, founder of Fiscability, to provide some further background around the advantages of investing into EIS investment in general, and of HMRC approved knowledge-intensive EIS funds in particular.
o2h Ventures launched the first HMRC approved ‘Human Health KI EIS Fund’ in October 2020. This focuses on investing into early-stage biotechnology companies in the United Kingdom. o2h Venture Funds have now invested into around 25 biotechnology companies, some of which have now progressed into the clinic which include Small Pharma, Exonate and Phoremost. Given that the o2h Ventures fund exclusively invests in Biotechnology it made sense to be quick out of the starting blocks as soon as legislation was passed in the House of Parliament.
The main tax benefits of EIS investment are 30% income tax relief on amounts subscribed for shares in qualifying companies and, provided EIS requirements are maintained for at least three years, complete tax exemption on gains realized when shares are sold. Added to this is further income tax relief for losses on unsuccessful companies, deferral of capital gains tax on gains from sale of other assets, and inheritance tax exemption after two years ownership, making EIS investment extremely tax efficient.
To support research and innovation, in 2015 the UK government introduced knowledge-intensive companies (KICs) into the EIS legislation. Originally, this allowed research oriented companies to raise more EIS investment than other companies and over a longer period.
So what is a KIC? Usually, R&D costs will represent at least 10% of total annual spending, and intellectual property will be created to underpin trading activities. The proportion of skilled employees, those with a relevant postgraduate qualification, may also be taken into account. Most biotech and early stage software development companies will qualify.
The rules for KI investing were improved in 2018, allowing an investor to subscribe up to £2 million a year (an increase from £1 million), provided the excess over £1 million went into KICs. But it became a lot more interesting from 6 April 2020, with the advent of HMRC approved KI Funds, the first of which was “the o2h human health KI EIS Fund”, launched by o2h Ventures in October 2020.
Many investors will know EIS Funds as a means of spreading risk, by investing across a portfolio of EIS companies. But downsides include a lot of paperwork- an EIS3 certificate must be issued for each portfolio company on which tax relief is claimed and fund managers can be forced into unwelcome investment deadlines to optimise tax relief.
HMRC approved Knowledge-intensive Funds are different. Investors get tax relief for the tax year in which the fund closes, or the previous year if they choose, and they receive a single EIS5 certificate (once 90% of the money raised by the fund is deployed). Tax relief to rely upon, simplified administration, and an exciting investment portfolio KI Funds should be here to stay.
Biotech is a highly knowledge-intensive industry where innovation is the key to success for the companies and a significant factor for growth of Britain’s economy. The focus of the o2h human health KI EIS Fund is to invest in these knowledge-intensive early stage biotech and related AI companies. With KI approved status, the o2h human health KI EIS Fund has successfully completed fund-raising for two of its closings, and will be likely to deploy the balance of these funds before 5th April 2022.
Reach out to us on invest@o2h.com to know more about Knowledge-intensive investing in the third o2h human health KI EIS fund before its closing date of 5 April 2022*
Disclaimer:
Please refer to the relevant fund’s full risk warnings contained in their Information Memorandums.
Your capital is at risk. Investing in early-stage businesses involves risks, including illiquidity, lack of dividends, loss of investment and dilution, and it should be done only as part of a diversified portfolio. o2h Ventures’ funds are targeted exclusively at sophisticated or high net worth investors who understand these risks and make their own investment decisions. *Tax relief depends on an individual’s circumstances and may change in the future. In addition, the availability of tax relief depends on the company invested in maintaining its qualifying status. Past performance is not a reliable indicator of future performance. You should not rely on any past performance as a guarantee of future investment performance.
o2h Ventures Ltd is a limited company registered in England and Wales under number 11397838 and is authorized and regulated by the Financial Conduct Authority (FRN 812245). The registered office and principal place of business is Hauxton House, Mill Scitech Park, Mill Lane, Hauxton, Cambridge, CB22 5HX, United Kingdom.
