The UK government has been giving generous tax allowances to angel investors helping start-up businesses in the form of Enterprise Investment Schemes (EIS). The Enterprise Investment Scheme was introduced by the government in 1994 to help small companies raise funds and grow. Individuals investing in an EIS-qualifying company could receive significant tax breaks and generate considerable returns if the firm prospers. These have been so successful that since its inception, over £24 billion has been raised for start-ups and made the UK one of the world’s most vibrant start-up environments.

In order to provide even better terms for investors and businesses alike, the UK government has introduced a further improved classification of the EIS scheme in the form of knowledge-intensive companies (KIC) with the HMRC setting specific requirements companies must meet to be categorised as knowledge intensive.

In March 2020, the Chancellor gave knowledge-intensive approved EIS funds the final go-ahead. In general, KICs are young and innovative businesses, which can enjoy a number of enhancements to the EIS regime so that they can receive more funding over a longer period of time. These funds make tax planning easier for EIS investors by giving a set investment date for tax purposes, help them receive EIS income tax relief earlier and can acquire a single EIS5 certificate.

In order to obtain the HMRC’s approval, a knowledge-intensive approved EIS fund needs to meet specific conditions, mainly that 80 per cent of its investments need to be in knowledge-intensive companies. In general, these are companies developing a new drug or treatment or carry out research, development or innovation at the time of the investment.

However, as investing in these kinds of businesses can be risky, in order to mitigate the risks and encourage investments, the UK government currently offers the following generous EIS tax reliefs:  

• A saving up to 30 per cent on income tax – up to £300,000 per year or £600,000 when investing in knowledge-intensive companies

• Very generous tax allowance up to £1 million or £2 million if anything above £1 million is invested in knowledge-intensive companies

• The ability to enjoy tax-free growth

• The option to defer capital gains from other investments – potentially indefinitely

• The ability to offset any future losses against one’s income to save income tax

• Pass on investments free of inheritance tax