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EIS investment can allow a capital gain in the current or preceding year to be deferred. Deferral of the capital gain is possible until you sell or transfer the investment (to someone other than your spouse or civil partner).

Income tax relief equal to 30% of the amount invested is obtained under each scheme and reduces your income tax bill accordingly. The tax relief is given as a reduction of your tax bill.

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Generally, EIS investments tend to be riskier than VCTs but successful EIS investments can produce greater income or gains. However, there’s no certainty of success and IFA guidance is recommended. There are also other tax advantaged schemes not covered in this article (Seed Enterprise Investment Scheme and Social Investment Tax Relief).

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Capital gains on any EIS or VCT investment are exempt from capital gains tax. Under EIS, the investment must be held for at least three years, but no such restriction applies to VCTs. If you make a loss on an EIS investment you can offset this against other gains in the same or future years. No such relief is available for VCTs.

For example, if you made a taxable capital gain in 2020/21, you could defer when it’s taxed by investing in an EIS company on or before 5 April 2022. Additionally, by using the carry-back rule mentioned earlier, income tax relief could be claimed for 2020/21.

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If you are considering investing in a tax-advantaged scheme, either an enterprise investment scheme (EIS) or a venture capital trust (VCT), there are some important differences in the tax breaks for each scheme. It’s worth remembering that where there’s a tax break, there’s often risk, so IFA advice is always recommended.