From 6 April 2018, the annual limit for investments in ‘knowledge-intensive’ companies through the enterprise investment scheme (EIS) and venture capital trusts will double. In this blog post, we look at knowledge-intensive companies and how investors can benefit from them in the forthcoming 2018/19 tax year.
What is a ‘knowledge-intensive’ company?
A business must meet 2 of 3 conditions to be classed as a knowledge-intensive company.
A company must meet an operating costs condition, as well as either the skilled employee condition or the innovation condition.
To meet the operating costs condition, companies must spend a minimum of 10% of their operating costs on research and development (R&D) in each of the 3 years before it issues shares.
Or it must spend a minimum of 15% on R&D in at least 1 of those 3 years.
Secondly, to meet the skilled employee condition, at least a fifth of the employees must have studied at a higher level and be active in the R&D process.
If a company fails to meet the skilled employee condition, it will need to meet the innovation condition which shows it is in the process of developing intellectual property (IP).
It will also need to demonstrate how this IP will form an integral part of the business in the future.
Current EIS rules
Investors are currently able to invest £1 million each year into all EIS companies, irrespective of whether they qualify as knowledge-intensive.
Under EIS rules, the government offers a generous 30% income tax relief in order to incentivise investors to put their money into these higher-risk companies.
Under the current regime, investors can reduce their income tax bill by a maximum of £300,000 by investing the maximum £1 million into EIS companies.
What is changing?
From 6 April 2018, the annual limit will double from £1 million to £2 million for investments made in knowledge-intensive companies.
This special exemption will apply only if the additional £1 million is invested in knowledge-intensive companies.
Investing the maximum into these companies will therefore see you net a total tax reduction of £600,000.
We can advise you
You should seek professional financial advice before committing to any investment decision.
Contact us on 0161 336 2222 or send us an email to discuss your savings and investments.
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