Blog85: Is Investing in EII A Viable Option?

Blog85: Is Investing in EII A Viable Option?

This week we are finally getting round to a topic that has been on 'the list' for quite a while. 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!

As is customary I would like to welcome you to Ireland's only dedicated and straight-talking Financial Planning blog & podcast! We are on a mission to change how financial advice is done in Ireland and to help people help themselves to make decisions which will benefit them in the future. Love to hear from readers and listeners so drop me a mail here with any ideas, suggestions or questions you have and I'll be sure to reply post-haste!

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?

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:

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?

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.

Pros:

  1. Tax - Beginning with the most obvious, the generous tax relief available to investors
  2. Potential Return - In addition to the tax relief you would hope to achieve some level of coupon or growth on the funds you invest in the company/fund
  3. Supporting - May not be top of an investors' list but an investment will potentially support a growing company to achieve their goals, create employment and provide better service/products to their customers
  4. Time-Bound - Unlike open-ended investments, or indeed long term pensions you can access your funds within a relatively short space of time

 

Cons:

  1. Under-diversification - We have discussed the difference between volatility and risk here before, volatility being the degree to which the value of your investment fluctuates, and risk being the chance of permanent loss of your capital. If you are investing in EII and only investing in 1, 2 or any other relatively small number of companies there is a real risk of one of these companies disappearing, along with your investment (this risk is reduced when investing in a 'fund' which contains many such companies and is 'managed' by a prudent manager - such a fund would cost you 2-5% of your investment in fees).
  2. Delays: There are well-known cases of investors not receiving their tax certificates and of delays in schemes getting approval through Revenue.
  3. Void: There is talk that a new scheme may be announced in Budget 2019, which would deem this void for future investment.....and would mean an introduction of a new scheme
  4. Ease of Investment: BDO & Davy joined forces over the years to manage such funds and were one of the most prolific and accessible for investors. However our understanding is that there is no scheme currently available there. Unless you read the back of the Times we fear you might find it less than easy to find and do your due diligence on potential companies for investment at the moment
  5. Relief: If you are not paying tax or are paying a reduced rate of tax than you were when you invested then the relief you actually get at that stage could reduce or disappear entirely
  6. Company: If for any reason the company you invested in does not stick to their commitment and the conditions of the scheme then some or all of your relief would become void

 

Scenario:

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.

DescriptionYour Investment GrowsYour Investment Falls
Initial Investment€50,000€50,000
First Batch Of Relief - 30%€15,000€15,000
Second Batch Of Relief 10%€5,000€5,000
Net Cost Of Your Investment€30,000€30,000
Cash-In Value€55,000€40,000
Capital Gain€5,0000
CGT Tax (after €1270 relief)€1,2300
Net Gain€23,770€10,000

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 might get back your initial investment.

Rental Income:

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:

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, so for that reason is one which could be well worth some individuals exploring the merits of it.....if they can find one!

Thanks,

Paddy Delaney

QFA | RPA | APA | Qualified Coach

 

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