We all want to pay less tax, but it has become increasingly difficult to do this over the past number of years, with a number of tax reliefs having been withdrawn altogether, and the amount that can be claimed for those that remain, reduced to a paltry amount.

One of the best ways you can reduce your tax bill, we know is by making contributions to your pension, but as good as that it is, it has an impact on monthly cash flow and you cannot access funds until you reach retirement age either. And even if you did want to make contributions to it, it has to be earned income, so those in receipt of income from renting out an investment property for example are not allowed to do reduce their income tax liability because rental income is not deemed to be earned.

Anyway, the Employment and Investment Incentive Scheme (EII Scheme) is one of the few remaining all income tax relief schemes that can be used to offset rental income and the amount you contribute isn’t tied up until you retire either.

And when I say all income, I am referring to PAYE income, self-employed income, rental income, dividends, share options (income) and pension or ARF income.

The EII schemes set up and arranged by the likes of Davys, BDO, Goodbody and many other small and medium size accountancy firms throughout Ireland, invest funds that are made up of established SME’s. They focus on indigenous Irish companies with future growth potential. And typically the funds they promote invest in a range of industries which reduce the investor’s exposure to any one sector. When the promoters of such schemes are assessing whether a company is suitable to invest in, the key criteria they will look at are as follows:

1. A capable and industry experienced management team
2. A recognised market for its products and services
3. Growth potential
4. Well defined market strategy
5. Prospect for realisation of investment after the four-year investment period

And one of the criteria is that you money is invested and will not be returned to you until after a 4 year period. And because the investment is not guaranteed (you could lose everything you invest) you may not get back anything in 4 years’ time either.

The people who invest in this type of scheme are those who have a tax liability they want to reduce or eliminate altogether and this is one way of doing this. I don’t believe it is an investment that someone should be considering unless they have a source of income they want to reduce their tax liability on.

How does the tax relief work?

You can invest amounts starting at €5,000 up to a maximum of €150,000 and increments are made in multiples of €1,000. If you exceed the maximum of €150,000 in any one year, the surplus may be carried forward to the following year.

Income tax relief comes in 2 tranches:

1. 1st tranche – 30% of the amount invested can be deducted from your total income tax for either the year of subscription ending 31 December 2016 or the tax year of investment by the fund ending 31 December 2017.
2. 2nd tranche – 10% of the amount invested can be deducted from your total income tax for the year of assessment following the end of the four year investment period.  

In the case of a husband and wife, each are entitled to invest an amount up to the maximum amount allowable to the extent that each has an income in their own right.

Operation of the Fund

1. The end date for subscribing to the EII scheme is 31 December 2016 or earlier if fully subscribed.  
2. No investment will be made before the closing date.
3. The Investee Company aim to invest the money as soon as possible but it may take up to 12 months to fully invest the funds.
4. The account is a pooled account i.e. all investors have their money put into one account.
5. The minimum investment term is 4 years, so do not invest if you feel you will need access to the amount you invest during that term.  
6. In exceptional circumstances, early encashment may be considered for an investor if a purchaser can be found. However, early encashment may result in the loss of income tax relief for the investor.

Are there any other costs? 

Typically a once-off fee of 3% of the investment amount is required at the time of investment to the manager and promoter of the particular EII scheme. And this fee does not qualify for income tax relief.

What happens at the end of the investment term?

When the shares are disposed of, the full acquisition costs can be deducted from the proceeds in order to calculate any gain for capital gains tax purposes.

However, if they are disposed at a loss, no allowable loss for capital gains tax purposes will be allowed.

The financials work something like this assuming tax relief at the highest rate and a return on the investment of 10%:

Risks

1. This is a medium term investment with a minimum investment term of 4 years from date of investment of the funds and there is no early exit mechanism.
2. If you invest in an EII scheme, you may lose some or all of your money.
3. There is no guarantee that the fund will achieve its investment objectives.
4. Investors are exposed to the performance of the small and medium sized companies in which the fund will invest.
5. Income tax relief which is available in two tranches may not be granted or may be withdrawn if the conditions of the legislation are not satisfied by the Manager, the Fund, Investee Companies and/or Qualifying Investors.
6. The Manager may not succeed in finding suitable companies and/or fully investing the Fund which may result in a return of un-invested funds and a reduction or recovery of the income tax relief already claimed or potentially available to Investors.
7. You may not have sufficient income taxable at the higher rate so that part or all of the first tranche of income tax relief on 30% of the investment amount, if obtained, could be obtained at a lower rate than the higher rate when applying.
8. The higher rate of income tax could reduce from its current 40% rate so that the second tranche of income tax relief on 10% of the investment amount, if obtained, in the year of investment following the end of the four year investment period could be obtained at a lower rate than the current 40% rate.
9. You may not have sufficient income taxable at the higher rate so that the second tranche of income tax relief on 10% of the investment amount, if obtained, could be obtained, could be obtained at a lower rate than the higher rate, then applying. No income tax relief will apply.

• Do you want to reduce your income taxes in 2016?
   
• You can save up to €45k this year by investing in the Goodbody 2016 EIIS Fund.
   
• By investing in our portfolio of growing Irish companies, you qualify for substantial tax relief against all income.
   
• One of the few ways to get tax relief of up to 40% on all income (including PAYE income, self employed income, rental income, dividends, share options (income) and pension or ARF income).
   
• A tax-based return of 30% is available upfront, with an additional 10% after four years subject to certain conditions being met by the qualifying companies.
   

The Irish economy is growing. This is an opportunity to get exposure to companies with the potential to deliver after tax returns of 12.5% per annum.