Enterprise Investment Schemes (EIS)

• Tax efficient
• High risk
• Illiquid
• HL discounts of up to 3%

An Enterprise Investment Scheme, EIS, is a tax efficient scheme for investing in small businesses. It's in the government's interest for small businesses to succeed, but companies often find it difficult raising capital. Banks won't lend and most institutional investors need to invest larger amounts of money often leaving the private investor (or business angel) as the only option. To encourage private investors, the government introduced generous tax incentives in exchange for locking investors in for a minimum of 3 years, although in practice the investment time horizon is much longer. The longer the timescale, the more risk there is to the capital due to inflation.

An EIS can be as simple as a single company investment or it could be a managed service or EIS fund offered by an investment manager (often a venture capitalist). However the investment is made, it is ultimately an investment into one (or a number) of small unquoted businesses.

Neither single company EIS or managed EIS services are traded on a stock exchange so withdrawing cash can be difficult or, at times impossible - therefore EISs should only be considered by sophisticated, long term investors. An investor's capital is often only returned when the underlying investment is sold. EISs are at the top end of the risk scale and are only suitable for sophisticated wealthy investors who can afford to lock money away for the long term.

Relief is potentially available from income tax, capital gains tax and inheritance tax, but these rules can change. As with any investment, never let the tax tail wag the investment dog. Just because the tax breaks are exciting, always ensure the full risks and potential rewards of an investment are understood.