Tax hacks: the investment that comes with a 30pc bonus and tax-free divis

2. The shares have to be unquoted when the investment is made

But this can include shares traded on the Alternative Investment Market, the junior London market. This rule does not prevent the company being floated subsequently on the full stock market.

3. 'Lemons ripen before plums'

You can make investments in an individual company but it is usually safer to spread the risk by investing in a range of different companies. The investment companies who sell EIS should have ensured that that the companies qualify for tax relief. Many young companies fail but professional investors have a saying: "lemons ripen before plums" – do not be disheartened if some companies fail early because one success can pay for many failures.   

4. Venture capital trusts offer an alternative way of investing...

...in young unquoted companies but have the added advantage that your investment is automatically spread across several different companies, much like a unit or investment trust. Income tax relief is again 30pc of the amount invested but here the shares have to be held for five years. Gains are however exempt with no time limit. Unfortunately you cannot roll over previous gains into a VCT.

5.  Dividends from VCTs are tax free

but payouts from EIS investments are not. Dividend tax applies in the normal way. 

6.  You can 'carry back' EIS shares and claim extra tax relief as if you bought them in the past.

This allows all or part of the cost of shares acquired in one tax year to be treated as if they were acquired in the previous tax year with relief then given against the income tax liability of that earlier year. This is not available for VCT investments.

7. There is a third programme – the Seed Investment Scheme (SEIS).

This applies to very small businesses with no more than 25 employees or start-ups. The tax treatment is the same as for EIS but with income tax relief given at 50pc.

8. There are no special inheritance tax reliefs with these investments...

... but in most EIS cases any shares held at death will be exempt from IHT under business property relief rules (as is the case with many Aim shares). This does not apply to VCT investments.

9. You do not need to be a high earner to consider these investments.

Even if you are only a basic-rate, 20pc, taxpayer you are given tax relief at the full 30pc rate until your income tax liability for the year is nil. To obtain the CGT exemption you need to have claimed income tax relief on the shares but there is no restriction on this exemption if the only reason full income tax relief cannot be given is because the claim reduces your income tax liability to nil.

However, some people cannot invest.

There are detailed rules that exclude employees from qualifying. Special rules do exist for so called “Angel” investors who subscribe for shares and become directors. As a director you have a much closer involvement in how the company operates and can help guide it to success. I remember a client who agreed to invest £30,000 as a business angel in a start-up established by a former colleague. It was so successful that he was soon working there as a paid full time director. When the company was taken over ten years later he sold his shares for over £30m – tax free!  

10. Remember – never invest solely for tax reasons.

Tax should be a consideration in investment decisions but it should not be the deciding factor. Where legislation provides tax advantages to encourage investment in companies it is there to compensate for the higher level of risk involved. You could lose all your money. Obviously we all invest hoping to make a profit but even if the company fails the tax rules, although complicated, may provide some help.

In most cases you can claim income tax relief on the loss in value of the shares as an alternative to a CGT loss. The calculation has to take into account the income tax relief already claimed but for a 45pc taxpayer the effective cost of a £100,000 investment could fall to just £38,500.