Enterprise Investment Scheme (EIS)

The taxman permits you to invest as much as you like annually in an an unquoted company and enjoy - in part - the benefit of some juicy looking tax advantages. The idea is to motivate private investors with an appealing tax break if they put money into smaller companies that are likely to be more risky. However, only the first £500,000 invested in any one tax year (£400,000 prior to tax year 2007/08; £200,000 prior to the tax year 2006/07) will qualify for income tax relief and capital gains tax exemption. For this purpose a husband and wife are treated separately. Individuals must subscribe a minimum of £500 in any one tax year.

The tax breaks are:

Income tax relief available at a rate of 20%. In other words, invest £1,000 and the taxman gives you back £200 !

Capital gains tax exemption if held for three years. Normally when you invest in shares, you receive a tax-free exemption. In the financial year 2007/2008, it stands at £9,200. But on bigger gains, you'll receive a tax bill at your highest rate of tax.

Unlimited capital gains tax deferral - you can defer paying a CGT bill by reinvesting in an EIS.

Relief against losses, which you may suffer on disposal. If your investment goes wrong and falls in value one consolation is the losses you've notched up can be set against any other profits you've made. In practice, this is only of value to people with gains in excess of £9,200 a year.

To claim the above tax benefits you must invest for a minimum of three years and satisfy some other criteria - check the investment you're thinking about is eligible under the scheme

Where a gain has been deferred, indexation accrued up to 5 April 2008 will not be lost when the gain becomes chargeable after that date. Taper will not apply to deferred gains from 6 April 2008.

The EIS scheme has so far not been an outright success. Some experts say the tax breaks are not good enough to persuade investors to take the higher risk which is usually associated with putting money into young and growing businesses.

EIS schemes have similar reliefs to Venture Capital Trusts (VCT's). However, the EIS tend to invest in individual companies and VCTs spread your investment between a number of companies, thereby spreading the risk. There are also differences in the way dividends are treated. EIS's were originally introduced in January 1994.

For more information and help with your tax why not try our tax calculator and tax tables .

Last Updated: March 2008 © Moneyextra.com

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