24th September 2018
If you are reading this you have probably been thinking about investing in EII schemes in Ireland. I hope this unbiased piece will help you.
(Update as of 5/12/19: we have just received an unsolicited letter here in Informed Decisions HQ, offering us 5% commissions on any funds we can get our clients to invest in an EII scheme. Needless to say this is not something we would entertain for a second for our clients. But there are many out there that will, purely for the 5% kick-back of what you invest. You were warned!)
This week we are finally getting round to a topic that has been on ‘the list’ for quite a while. EII schemes in Ireland. One of the main benefits of pensions that ‘the industry’ of financial services harks on about a lot is the tax relief that is available on contributions, and that is certainly true. Having said that what is not true is that pensions are the only tax effective vehicle in which to invest in this fine country of ours, there is also (among a handful of others) the Employment and Investment Incentive Scheme as declared by the Revenue. This is the artist formerly known as Business Expansion Scheme (BES)!
We will now share the ins-and-outs of this scheme, the pros & cons and hopefully a few examples which will show how an investor (with a lump sum) might aim to reduce his or her income tax bill by investing in such a thing. Like night becomes day the rules around this Scheme can change in future but they are a reflection of things as they stand today!
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Oh, regular readers might recall that we won Best Finance Blog in Ireland last year, we are short-listed again this year and the awards are on 25th October……it might be a case of ‘difficult 2nd album’ but sure we’ll see how we go……It’s not about winning it’s about taking part and all that!
What Is The Revenue EII Relief? EII schemes in Ireland.
So what is the Employment and Investment Incentive Scheme? (lets stick to EII). The Revenue wording as per their Part 16-00-10 states that it is a tax incentive which provides for tax relief of up to 40% in respect of investments made in certain corporate trades. For companies it was designed to enable them attract funding in order to grow and I guess to generate employment, hence the title of the relief.
As an investor an individual can obtain income tax relief on investments for shares in certain companies, up to a maximum of €150,000 in each tax year, up until 2020.
And this is the big draw, you are allowed relief of 40% on an investment of €150,000 each year for this and the next 2 years! Happy Days! The relief is split between the year of the investment and the 4th year after the investment. In essence you get 3/4 of your relief in year 1 and 1/4 of the relief in year 4. (scenarios detailed in a minute!).
Revenue are very clear to put their own disclaimer on such relief and warn investors that such investments are ‘risk finance investments’ and that ‘there is no guarantee that they will generate a return and could in fact result in a loss for the investor’. You’ve been warned!
Conditions of EII schemes in Ireland:
As with any scheme or offering of relief there are certain conditions that must be met on both the Company and the Investor side. Our focus here is on the investor, and the investor, in order to eligible must:
a) Be resident in Ireland for the tax year in which she makes the investment
b) Owns the shares in the qualifying company (or nominate another/a fund to hold them on her behalf)
c) Not be connected in any way with the company or it’s subsidiaries for 2 years prior to, and 4 years after the investment
From a company perspective, most are eligible for EII Relief, provided they are micro, small or medium sized trading companies (less than 250 employees and turnover less than €50m or balance sheet not exceeding €43m!). Good news for me is that Informed Decisions as a company has another 2 or 3 years before it will become ineligible!!
Pros & Cons of EII schemes in Ireland:
We will share a number of the main pros and cons associated with an investment in such a vehicle, this is by no means an exhaustive list but will give a sense of the main aspects might consider relevant.
Cons of EII schemes in Ireland
So we have seen the basics, we have looked at the main and obvious pros and cons of such an investment, we will now take a look at a scenario or 2 in order to look at the maths of investing in EII.
Your Initial Investment in each scenario is €50,000, you are lucky in that the company returns a growth of 10% in scenario A but in Scenario B it falls by €10k.[table “4” not found /]
It could be said that even if you do get less back than you invested, in certain situations you could still end up in positive territory! Having said that neither of these scenarios plays the situation out where a company fails entirely, in which case you will lose your initial investment. Now that is what we call ‘risk’!
This was one of the draws of EII that really attracted some investors and that was the fact that one could use the relief being availed of by investing in EII to reduce the tax payable in rental income, which made it unique indeed! For instance if you had rental income of €20,000 per year and were paying full income tax, PRSI and USC on that income, you would be getting approx €10,000 of that into your hand potentially paying €8,000 income tax per year. If she was to invest say €40,000 in EII scheme her year 1 relief (30%) would equate to more than the income tax she was paying from the rental income…….which is a nice way to manage that particular bill!
Conclusion to EII schemes in Ireland:
By all accounts the scheme is not perfect, there are flaws, and there are clearly risks involved (whatever about volatility, risk is another story entirely!). Having said that the pros-side is also fairly well loaded and depending on one’s circumstances there is relief available that no other financial tool provides to investors.
Personally, I wouldn’t touch it. Why would I invest a large lump sum on a single fledgling enterprise, unless I was personally involved and knew the personnel involved? If I do this I risk losing my entire investment, in order to try benefit from tax relief over a particular duration. With other available and viable options which don’t carry that same risk and lack of understanding of the business, it could be perceived as a crazy approach to take.
Check out the ‘Work with Us‘ page when you are in need a truly independent Financial Planner.
Our recent review of Self Administered Funds in Ireland may be of interest to you.
Our recent insights on Multi-Asset Funds in Ireland – it might surprise you!
Paddy Delaney QFA | RPA | APA | Qualified Coach
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