Enterprise investments have many benefits, for a price

ENTERPRISE Investment Schemes (EISs) were launched in 1994 but despite a wider range of potential tax benefits are less well known than VCTs.

EIS investments attract tax relief at 20 per cent and CGT is deferred as long as the investment is held for a minimum three years, with the tax relief available through HMRC form EIS5. There are also inheritance tax (IHT) advantages. EIS investments held for at least two years but continuing to trade and held at the time of death fall outside an estate for IHT purposes, with full relief against the value of the investment.

Tom Munro, director of Tom Munro Financial Solutions, outlined the example of the potential tax savings from a 50,000 EIS investment, which would return 10,000 to the investor in tax relief, giving a total gross investment of 50,000 for a net outlay of 40,000.

"Re-investing the 10,000 tax relief into an approved pension plan would gross up to 12,500 at basic rate, and higher-rate taxpayers can claim an additional 20 per cent relief through self-assessment," Munro added.

As with VCTs, however, there is a risk of letting the tax tail wag the dog. Investors must ensure an EIS fits into their overall investment plan and that they are comfortable with the risk level. The upfront and ongoing charges on EISs are often steep, eroding capital growth. Initial charges of up to 6 per cent are common, while total expense ratios can reach 4 per cent.

Munro recommended the EIS products run by Octopus Investments, which runs lower-risk VCTs and EISs .

"By investing a substantial proportion of the funds received from investors in companies well-known to Octopus, investment risk is limited to the creditworthiness of the companies and where there is credit risk, it will be reinsured out," said Munro.