A very attractive tax break

*While EIS offer excellent tax incentives for investors, the underlying investment risk should be considered in conjunction with your IFA.

A lot of the marketed EIS seek to protect investors' capital so that an investment of £1 is targeted to deliver a return of £1 after the minimum three-year holding period.

The increase in the income tax relief means the tax break alone equates to returns on the net investment increasing to 42% net of tax (14% per annum). This excludes any return or loss from the underlying investment, which also needs to be considered although, as stated above, many EIS seek to protect the investors' capital.

You can also defer Capital Gains Tax to save a further 28% tax; if the investment is held for two years it will be exempt from Inheritance Tax, providing a further 40% tax saving. The total tax relief that can be achieved on an EIS investment is therefore a staggering 98%.

In his Budget announcement on 21 March 2012, the Chancellor highlighted the importance the Government places on EIS as a means of encouraging investment in small businesses by increasing the subscription limit of £500,000 to £1million per individual per tax year.

The Chancellor also introduced the Seed Enterprise Investment Scheme (SEIS) from 6 April 2012, with tax relief of 50% being available on subscriptions of up to £100,000 per annum into qualifying companies.

EIS investments are normally made towards the end of the tax year to minimise the time period between making the investment and claiming the relief on the tax return. If you make an EIS investment now, when you get your EIS 3 certificate you can ask HM Revenue & Customs to include the income tax relief in your 2012/13 PAYE code so that the full tax relief is received by 5 April 2013.