VENTURE Capital Trusts and Enterprise Investment Schemes are often talked of in the same breath because both offer generous tax incentives to encourage sophisticated private investors to invest inhigher-risk small trading companies. Both offer 20 per cent income tax relief, plus the ability to defer capital gains tax bills. The shares must be held for at least three years to qualify for thetax breaks.

But there are important differences. EISs are single company investments while VCTs invest in a spread of stakes.

The maximum investment qualifying for 20 per cent income tax relief is pounds 150,000 in an EIS compared with pounds 100,000 in a VCT – although the British Venture Capital Association is lobbying strongly for this to be raised to 40 per cent for both VCTs and EISs.

The big selling point of an EIS is the ability to shelter an unlimited amount of capital gains tax liability built up over the previous three years. With a VCT, the liability must have arisen over the previous 12 months.

Unlike a VCT, an EIS investment falls outside your estate for inheritance tax purposes if you survive for two years after making the initial investment.

Also, in contrast to VCTs, EISs qualify for “loss relief” if the company fails, so you can offset a loss against a gain on another investment. This means that higher rate taxpayers can never lose more than about half their money because, not only have they been given 20 per cent tax relief when they made the investment, they can then offset 40 per cent of the loss against another gain.

Qualifying EIS shares, as with VCTs, are also exempt from CGT on profits from the EIS itself once they have been held for three years.

You should never consider investing in an EIS without consulting advisers who are experts in the field.