Julian Hickman writes in this week's Professional Advisor:

"VCT and EIS funds offer a good route into enterprise investing and have the added attraction of offering tax relief, writes Julian Hickman, partner, Longbow Capital LLP.

Investing in early stage, dynamic, innovative British companies is something all investors should give serious consideration to. The life science, well being and healthcare sectors are typical examples of the British investment opportunities available.

However, not all openings are equal, and investors need to consider carefully how they can access such opportunities. One such way is to invest through Venture Capital Trusts (VCT) and Enterprise Investment Scheme (EIS) funds, both of which offer a range of tax reliefs for investing in innovation and reflect the risk and rewards available...." > Read More of Julian's article 'Reaping the rewards of British innovation at ifaonline.co.uk.

Advisers are slowly waking up to the realisation that an investment in an EIS scheme is a great way of IHT planning. The investment falls outside their client's estate two years after investment; there's nothing else on the market that can deliver that much relief in such a short time span.

In this, the last part of the Questions and Answers Series, Julian Hickman aims to answer a question recently posed to him by IFAs relating to the EIS scheme and the IHT opportunities associated with it.

Question 5: I understand that an EIS investment can be used as part of IHT planning for a client. How exactly does this work?

Julian's answer: Strictly speaking, it is not EIS that offers IHT relief, but direct investment into unquoted companies that qualifies for 100% Business Property Relief, once they have been held for 2 years. However, as most EIS investments are made into unquoted companies, an EIS investment generally means the investor will be entitled to IHT relief. There is no limit on the amount that can be invested into an EIS Fund and subsequently gain IHT relief. Effectively this means that an investment into an EIS fund qualifies for 100% BPR once they pass the second anniversary of the date of investment. It is worth just pausing here because EIS funds are NOT like Unit Trusts which are usually fully invested at the point at which you invest. An EIS fund starts with no holdings and begins investing the moment it closes/you subscribe. In the case of an Approved EIS fund, it can take up to 10 months to complete the fund's investment. For an investment of 750,000 full IHT relief will be achieved at something between 2 and 3 years from the date the investment is made.

This is the last instalment of Julian's IFA Questions and Answers session for this tax year but Julian will be back again in April answering more questions on the topic of EIS and Venture Capital investment. Watch this space....

If you have any questions relating to EIS and want to be part of future Questions and Answers series' please email them to nrobson@longbow.co.uk or post a comment below.

This year interest in our EIS funds hasn't just been limited to income tax opportunities. A number of advisers have clients with capital gains that they had to pay at 40%. For these people, the opportunity to have this returned to them whilst they are invested in an EIS scheme, and then, when they come to repay it, to only have to do that at 18%, is too attractive to miss.

In this, the second part of the Questions and Answers Series, Julian Hickman aims to answer questions recently posed to him by IFAs relating to the EIS scheme and the CGT opportunities associated with it.

Question 3: An EIS fund offers capital gains tax opportunities too. Can you describe these?

Julian's answer: Subject to the 3 year qualifying rule, an investment in an EIS fund will be free from CGT. Unlike income tax, there is no maximum limit o the size of an investment that can be made and which wiill be 100% free of CGT. An additional element of relief is Deferral Relief. When an investor makes an EIS investment, he may defer an gain crystallised in the 36 months prior to the point of investment - or 12 months into the future - and hold onto this deferred gain until he is finally out of the EIS fund.

Question 4: Can you give an illustrative example of how this deferral could benefit an investor?

Julian's answer: Taking a recent example, a client makes an investment of £150,000 into an EIS fund in April 2010. In June 2007 he sold a share portfolio and paid a CGT bill for 40% of that sales; £25,000. He can claim that payment back from HMRC - in addition to receiving his income tax relief - and hold it until he exits from the EIS fund, at which point he must pay the deferred gain back to HMRC at the prevailing rate, which is currently 18%.

If you have any questions relating to EIS investments and would like to be part of the Questions and Answers series please email nrobson@longbow.co.uk or post a comment below.

A number of advisers have contacted us recently concerned that the budget on the 23rd March could contain changes to the EIS rules that might affect their clients' investment in our funds.

This is particularly relevant to advisers who have clients that have applied to invest in the 2010 Approved EIS Fund.

As soon as we know the detail of the budget we will discuss the changes, if any, to EIS reliefs with each adviser and how that may, or may not, affect their clients.

We can then confirm whether or not their client is invested in the right fund for them to maximise their EIS relief, and if we need to make changes, make sure they are undertaken in time for the tax year end.

We will also provide an update on our website for any changes that are announced to EIS relief in the days following the budget.

Julian Hickman, Longbow Partner, has recently been featured in Investment Adviser writing on EIS investment. Click here to read the full article on FTonline.

Reviews on Longbow's EIS Funds are now available in Martin Churchill's Tax Efficient Review and Allenbridge's Tax Shelter Report.