Enterprise investment schemes

Because it is an investment into an unquoted company it is treated as a business asset”. This means that after two years your holding falls outside of your estate and so is exempt from Inheritance Tax. Also, if you buy more than £400,000 of EIS shares and make a capital gain on them, after two years the gain on the excess investment would only be taxed at 10%. This is because accelerated taper relief applies.

Unlike VCTs, there are no exemptions to tax on EIS dividends. After all, the usual objective is to make capital gain not to generate income. Also note, that if you are sheltering a capital gain, that when you sell your EIS shares your original capital gain comes back into charge. So, at that time, you must either pay the tax or reinvest into another similar scheme.

EIS investments are into single companies, there is no risk reduction from the portfolio effect – unless you invest in a number of EIS companies. This is possible by investing into an EIS fund. These funds raise capital for investment into a number of EIS qualifying companies and in this sense are similar to a VCT. However, their funds are usually much smaller and consequently are restricted to investing in fewer companies. Hence EIS funds are more risky than VCTs as well as giving different tax relief. A key point is rather than holding shares in a single investment company you hold shares in the underlying companies and get the tax breaks as the investments are made. If the fund manager cannot meet the investment time rules you may lose some of the tax-relief expected. Another important difference is that the fund manager will normally look for growth and an early exit route after the three year limit in order to realize gains. Hence, they are aimed at mid-term gains rather than the continuing stream of dividends from VCTs.