EIS guide

39 38 EIS STRUCTURES EIS STRUCTURES EIS funds EIS funds pool investors’ money and invest in EIS-qualifying opportunities that are in line with the funds’ investment mandate. Each investor will have beneficial ownership of the underlying investments and will receive shares in each investee company, pro rata to the size of their investment into the fund. Again, technically this is not a ‘fund’ in the same sense as a conventional OEIC or other form of collective investment. The investor does NOT own units or shares in the fund and their underlying investments may differ from other investors, depending on when they first invest into the fund. This is the arrangement that is most commonly referred to as an EIS fund. Advantages of EIS funds Specialist expertise in sourcing and selecting opportunities Access to professional service firms (or the in-house capabilities) to advise on the qualifying status of investee companies, both ongoing and at the point of the share issue Ongoing oversight of investee companies, and a big enough stake in the underlying companies to have influence over board level decisions or a seat on the board itself Expertise in negotiating and/or structuring of the eventual exit from the underlying investments Increased diversification The UK has set a precedent in creating a conduit that connects the UK’s investors with its growing pool of entrepreneurial talent. Without schemes like these in place, the alternative finance arena could be perceived as too daunting for investors. This connection is vital for the growth and scalability of many of the UK’s successful SMEs. MARK BROWNRIDGE, DIRECTOR GENERAL, EISA Approved EIS funds An ‘approved’ fund has 12 months to invest 90% of the funds it has raised across a minimum of four companies, with the amount invested in any one company not exceeding 50% of the fund capital. The advantage for investors is that the administration is greatly reduced for them, with a single EIS5 form being issued once 90% of the funds have been invested. Investors receive a single EIS5 form and can treat the date the fund closed as the date of investment for the purposes of claiming EIS income tax relief (the reference date for EIS deferral relief remains the date the investment is made into the investee companies). The 12-month timeframe requires the manager to have a high degree of confidence that they can deploy the money quickly. ‘Unapproved’ (i.e. funds that aren’t ‘approved’) funds don’t have such constraints on how they deploy their money, giving them greater flexibility and, therefore, unapproved funds make up the majority of EIS funds today. However, it should be noted that no tax relief is available until the funds are deployed and the administration is potentially more complex, with investors receiving multiple EIS3 forms (refer to page 34 for more details). It’s worth noting that some investors and advisers favour receiving multiple EIS3 forms, as it allows for more flexibility in tax planning. Whether a fund is approved or unapproved, CGT deferral relief, the holding period to qualify for IHT relief and the minimum holding period to qualify for income tax relief are based on the dates of the underlying investments. As noted earlier, approved and unapproved funds are terms HMRC use to describe the status of the funds in relation to the administration of the tax reliefs. They are NOT regulatory terms and they do not refer to the likely performance or quality of the funds in any way. EIS KNOWLEDGE-INTENSIVE APPROVED FUND In the Autumn 2017 Budget it was announced that a new EIS ‘knowledge-intensive’ approved fund will be launched, replacing the current approved EIS fund structure. The new fund was introduced in the Finance Bill of 2019-20 and is intended to take effect from 6 April 2020. Its main features include: • at least 80% of the funds raised will need to be invested in KICs within two years • at least half of the funds raised will need to be invested within 12 months of the fund closing and 90% within two years • the managers must provide ’appropriate’ information to HMRC Commissioners. The legislation offers certain advantages to investors in approved knowledge- intensive funds, in particular that they may be able to obtain relief ”earlier than if the fund had not been approved”. It should be noted that the fund would be subject to EU State-aid requirements, and so the outcome is dependent on EU exit negotiations.