Launched back in 1994 by the government, the EIS was set up to give individuals the opportunity to invest in smaller companies that are looking to raise finance, with tax relief for those investors who purchase new shares in those firms.

In 2012, the government followed this up with the Seed Enterprise Investment Scheme (SEIS) with yet more tax incentives. SEISs, which complement EISs, are designed for small, very early-stage companies seeking equity finance by providing a range of tax reliefs to individuals who buy new shares in these companies.

According to HMRC: “SEIS is intended to recognise the particular difficulties that very early-stage companies face in attracting investment, by offering tax relief at a higher rate than that offered by the existing EIS.

“The rules have been designed to mirror those of EIS as it is anticipated that companies may want to go on to use EIS after an initial investment under SEIS.”

To qualify for income tax relief on SEIS, investors must hold the shares for at least three years, with relief available at 50 per cent of the cost of the shares on a maximum £100,000 investment per year.

The income tax relief available for investors through EIS is 30 per cent of the cost of the shares on an annual investment of £1m.

Similarly, Venture Capital Trusts aim to encourage investment in unquoted companies by offering tax incentives.

In this year’s Budget the chancellor confirmed that the SEIS had been made permanent.

George Whitehead, manager of the Venture Partners team at Octopus Investments, commented: “SEIS is a great tool for entrepreneurs looking to raise the first £150,000 of investments. Raising the first round of funding is tough for start-ups and the risks associated with investing in brand new businesses are high.”

It seems obvious to state that investing in early-stage or small companies carries a certain element of risk but investors would be wise to weigh up the risks before taking the plunge in this type of tax-efficient investment.

The Budget also marked the beginning of a series of reforms to the pensions industry when George Osborne announced that those reaching retirement will not be obliged to purchase an annuity from April 2015.

Commenting in the aftermath of the Budget, Mark Williams, business line manager for inheritance tax at Octopus, noted that the proposed pension reforms may be good news.

He added: “If they’re implemented, the changes would give investors improved flexibility and access to their pension savings, opening up greater opportunities for them to address their estate planning requirements through investment solutions that help mitigate inheritance tax.”

With the changes to pensions on the horizon and investors becoming increasingly savvy about tax planning, the next 12 months could bode well for the EIS industry.

Ellie Duncan is deputy features editor at Investment Adviser