We all take different approaches to investing. Some of us invest purely for the potential financial return, and enjoy the thrill of a high risk investment.
Others take a much more cautious approach, and prefer to invest their money in nothing riskier than government bonds. They know a high return is unlikely, but they're looking for steady and reliable growth first and foremost.
And one of the most appealing aspects of investing for me personally is the range of options that are available. An awareness of all available options enables you to invest your money however you wish, whether you're seeking higher risk/higher returns or the complete opposite.
Yet almost regardless of your approach to investing, the Enterprise Investment Scheme (EIS) is worthy of further exploring. In my eyes, it's one of the best investment schemes UK investors can participate in - and there are nine clear reasons why.
1. It's open to everyone
It genuinely doesn't matter whether you're investing £10 or £10,000 into an EIS-eligible opportunity. You'll be able to benefit from the exact same EIS tax reliefs and see the exact same rate of return per pound invested.
2. You get immediate income tax relief on your investments...
One of the most appealing benefits of the Enterprise Investment Scheme is that you can receive up to 30% income tax relief on your investment, up to a maximum of £300,000 relief every year.
To benefit from the tax relief, you need to hold your shares in the company for a minimum of three years, but this can be easily achievable on the understanding investments into EIS-eligible companies should be considered a long-term investment.
3. ...and those investments can be numerous
Each and every year you can make investments into EIS-eligible companies up to a combined total of £1 million. Whilst this could, theoretically, be one £1 million investment, it is more common for this to be a collection of smaller investments.
This allows you not only to benefit from all of the relevant tax reliefs on every investment, but gives you the opportunity to diversify your portfolio and helps you to mitigate your exposure to risk.
4. It's a well-established scheme
Although many are coming across the EIS for the first time, the scheme has been a staple of many investors' toolkit since its introduction in 1994.
Having helped businesses access £1.65 billion in 2015/16 alone, the scheme may be new to many, but the reality is it's been helping UK companies to secure vital growth capital for over two decades.
5. Your profits from an investment are tax-free
As with all investments, a return on your capital from an EIS investment isn't guaranteed.
When investments do increase in value, non-EIS investments will be liable for Capital Gains Tax (CGT) above the personal GCT-free allowance. This means if you invested £10,000 that you subsequently sold for £100,000, your capital gain would be £90,000. Your CGT-free allowance is currently £11,300 (as of the 2017/18 tax year), making your taxable gain £78,700 (with the rate depending on the source of the gain and your income tax band).
With EIS investments, all growth in value is completely exempt from CGT. You pay £0 tax on this (and retain your CGT-free allowance to apply to other investments).
6. Deferring your existing CGT liability is completely possible
One of the less prominent benefits of investing into opportunities that are EIS eligible is that if you have a CGT liability, regardless of how it was incurred, you can completely and wholly defer it.
The way this works is simple.
Let's imagine a non-EIS investment increased in value by £100,000 when it was sold. Take off your annual £11,300 CGT allowance and you'd be liable to pay CGT tax on £88,700 (your taxable gain).
If you invested this £88,700 into an EIS-eligible opportunity, you could defer your CGT tax bill for as long as suits you.
And again, whilst returns are not guaranteed, it would be reasonable to consider your investment may have produced a return in this time that subsequently can pay off the deferred tax bill.
Although the capital will still have to be paid eventually, you can make it work for you in the interim.
7. Investments aren't liable for IHT
If you're thinking about how your estate may exceed your Inheritance Tax (IHT) tax-free allowance (the nil-rate band), you can sit back and relax knowing your EIS investments are completely exempt from IHT and do not count within your nil-rate band.
As with the income tax relief, you do need to hold your investment for a qualifying period, although IHT exemption is achieved after having held the investment for two years. Plus, the two year period is short compared to the seven years that asset transfer requires to acheive IHT exemption.
8. If things don't go to plan, you can claim attractive loss relief
Investing into EIS-eligible companies generally means investing in early-stage companies. With less traction behind them than their established counterparts, this represents an increased exposure to risk and, as mentioned, returns aren't in any way guaranteed.
To help offset the level of risk involved, the EIS provides loss relief at your marginal tax rate.
This effectively means for additional-rate taxpayers, combining income tax relief and loss relief, the amount of capital you have at risk in an opportunity is reduced to just 38.5%.
9. It can provide the perfect introduction to investing
There are a considerable number of routes open for everyone to begin their investment portfolio, but it's hard to argue that the EIS does not represent a good middle ground.
For instance, if we look at the Seed Enterprise Investment Scheme (SEIS), whilst the tax reliefs are more generous, businesses that are SEIS-eligible are at an even earlier stage than EIS-eligible companies and therefore bring with them a greater level of risk.
Conversely, investing in main market equities carries much less risk than EIS, but also doesn't carry many - if any - of the tax reliefs.
With EIS, you could invest £100 and the worse case scenario for additional rate tax payers is you would lose £38.50.
Of course, a loss is still a loss, but it's undoubtedly better to lose - in a worst case scenario - a little over a third of your initial investment than all of it.
There are a wide variety of tax efficient investing options open to UK investors, all of which offer generous tax reliefs.
We touch on most of these in our tax efficient investing webinar (which you can watch on-demand), but EIS is often seen as one of the most appealing to investors - and from my point of view, it is actually one of the best investment schemes available in the UK.