1) Capital at risk

Investments in EIS-qualifying companies are high risk, as these businesses are typically in their early stages. The value of investments can decrease significantly, and investors may lose their entire capital.

2) Volatility in smaller companies

Shares in smaller companies tend to fluctuate more than those of larger, well-established firms, making EIS investments particularly volatile.

3) No guarantee of tax relief

EIS tax benefits depend on current legislation and personal tax circumstances. Changes in tax laws or the interpretation of these laws by HMRC could affect the availability of relief. Moreover, if a company loses its EIS status within three years, you may need to repay any tax relief claimed, and future tax benefits would be revoked.

4) Limited exit opportunities

As EIS shares are typically unlisted (including those listed on AIM), they may be more difficult to sell compared to shares traded on the main London Stock Exchange. To qualify for certain tax reliefs, investors must hold their shares for at least three years, but it is often necessary to hold them for much longer, sometimes up to ten years or more.

Before investing in EIS-qualifying companies, it's essential to carefully assess and understand the associated risks. Both the potential returns and risks of EIS investments are largely influenced by the specific companies chosen and the expertise of the specialist manager responsible for managing the investments.