Chancellor Rishi Sunak has signalled the go-ahead for the long-awaited ‘approved knowledge-intensive fund’ for the Enterprise Investment Scheme (EIS).
The Budget’s papers included confirmation that the approved fund structure, which was first set out in pre-Budget documents published in July 2019, will continue “unchanged”, meaning the fund is scheduled to come into force on 6 April 2020.
The plans will require approved funds to focus on knowledge-intensive investments. They will also require approved funds to invest 50% of their cash within one year of the fund closing, and 90% within two years (compared to the current requirement of 90% within one year). The changes will also allow investors in an approved fund to set their income tax relief against liabilities in the tax year, or against their liability of the previous tax year, before the fund closes (previously, it was impossible to carry back income tax relief to the previous tax year under an ‘approved’ fund).
Sunak’s first Budget did, however, make the widely anticipated changes to the tapered annual allowance for pensions, raising the threshold to £200,000 (previously £110,000) before the taper threshold kicks in. If adjusted income equates to more than £240,000 (previously £150,000) the annual allowance is reduced by £1 for every £2 earned in excess of £240,000.
Change to the taper had been expected after the government promised to look at the issue, after it emerged top clinicians were opting not to take on overtime for fear of going over their limit. Sunak said the changes would “take around 98% of consultants and 96% of GPs out of the taper altogether”.
Interestingly though, there is a sting in the tail for even higher earners, allowing the government to claw back some of the tax losses these increased thresholds will generate: The minimum tapered annual allowance will reduce to £4,000 (previously this was set at £10,000) at an “adjusted income” level of £312,000 and above.
The taper has previously been partially credited with increasing the take-up of EIS with higher earners looking for tax efficient alternatives to pension accumulation. However Mark Brownridge, director-general of the EIS Association, insisted that the changes would not have a significant impact.
“The level of investment into EIS shouldn’t be dependent upon changes to the pension regime,” he said. “EIS is a fantastic investment opportunity in its own right but only for investors who have the appropriate attitude to risk and capacity to loss.”
Meanwhile, the Budget also pledged further investment to increase public research and development (R&D) investment to £22bn per year by 2024-25. This included £200 million for investment into life sciences – a sector that is also eligible for EIS investment.
Brownridge welcomed the new money and suggested there remains a place for lots of different funding solutions for R&D.
“R&D has a specific purpose in aiding investment into research and development type businesses and life sciences always struggles for investment given the long holding period of investment required,” he said. “EIS, as the government has identified many times, fills a specific funding need for companies in a wide and diverse range of sectors and this shows no sign of abating.
“Consistently, demand outstrips supply for EIS investment so I don’t anticipate a reduction in companies seeking EIS.”
In fact, the possibility of government assistance through R&D support could make EIS investments into those companies receiving it even more attractive.
The Budget had also been expected to make a number of announcements relating to inheritance tax (IHT), with rumours in the weeks leading up to the speech that Sunak could be planning to replace the tax altogether, or remove reliefs such as Business Relief.
However, in the end there was no mention in either the speech or the main Budget documents regarding IHT, suggesting the government recognises the important role that Business Relief and other regimes play in supporting businesses.
And in a further boost to the tax-advantaged investments market, there were no new changes or references to EIS or Venture Capital Trusts in the Budget, bolstering confidence that the government clearly believes these schemes to be working as intended.
Sunak did, however, make changes to Entrepreneurs’ Relief, reducing the lifetime limit from £10 million to £1 million. Many had expected the government to abolish the relief altogether – with Sunak himself even calling it “expensive”, “ineffective” and “unfair” during his speech.
The overall picture, therefore, is one of continuity and progress for the tax-advantaged investments market, and those in the EIS sector can be confident of the direction of travel now that the new approved KIC fund has been confirmed for its introduction in time for the new tax year.