How to invest in unquoted equity

These are the options for investment, in order of risk:

1. The Enterprise Investment Scheme.

The replacement for the discredited Business Expansion Scheme, EIS became law in last year's Finance Act. Individuals can invest up to £100,000 a year directly in private companies. They receive 20 per cent income tax relief on the money subscribed as well as rollover relief from any previous capital gains. Capital gains generated in the EIS are tax-free provided the investment is held for five years.

Unlike Venture Capital Trusts, CGT relief does not extend to third parties if the original investment is sold, and there is no income tax relief on dividends generated by the investment.

2. Venture Capital Trusts.

VCTs became law in this year's Finance Act. Individuals can invest up to £100,000 a year and receive 20 per cent income tax relief on money subscribed and rollover relief from previous capital gains. Dividends and capital gains generated by the VCT are tax-free. Shares must be held for five years to gain the tax breaks. A VCT is a pooled vehicle managed by professional fund managers with risk spread across several companies.

3. Venture and development capital investment trusts.

Some 20 are quoted on the stock market. Track records are mixed. Of the better performers Foreign & Colonial Enterprise Trust has turned an investment of £100 five years ago into about £250 now, according to the Association of Investment Trust Companies. As a sector, venture capital investment trusts have underperformed the FT All Share index over the past five years, according to Micropal.

4. 3i.

A venture capital investment trust and an FT-SE 100 constituent. The safest bet because of size and spread.