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Tax Relief Scheme

All income tax relief scheme
It is getting increasingly difficult to find methods of reducing your tax liability. Pensions are the most common method used to reduce your tax bill but they have their drawbacks – you cannot access the fund until you are 60 and contributions must be from earned income. This means you cannot make pension contributions in respect of rental income. The Employment and Investment Incentive Scheme (EII Scheme) is one of the few remaining all income tax relief schemes left that can be used to shelter rental income and isn’t tied up until you retire.  

What is the The Employment and Investment Incentive Scheme (EII Scheme)?

The EII Scheme invests in a fund that is made up of established SME’s. The focus is on indigenous Irish companies with future growth potential. The fund invests in a range of industries which reduces exposure to any one sector. When the Manager is assessing whether a company is suitable to invest in, the key criteria they look at are:

  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

No investment in any one company will exceed 40% of the total amount subscribed to the fund.

The minimum size of the fund is €1,000,000 and the fund cannot exceed €15,000,000.

How does the tax relief work?

You can invest from €5,000 up to a maximum of €150,000 into the scheme. 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 – 3/4ths of the amount subscribed 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 – 1/4ths of the amount subscribed 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 subscribe up to €150,000 to the extent that each has their own income.

The investment term itself is for a minimum of 4 years.

Who runs it?

The scheme is a joint venture between BDO and Davy. They have a proven track record in providing these schemes:

  1. Successfully raised 5 EII Scheme Funds over the past 5 years
  2. Previously raised 19 BES Funds over the last 21 years
  3. Raised over  €154 million which is invested in over 154 companies

Operation of the Fund

  1. The end date for subscribing to the fund 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 these funds during that term.  
  6. In exceptional circumstances, early encashment may be considered for an investor if a purchaser can be found. Early encashment may result in the loss of income tax relief for the investor.

Are there any other costs? 

A once-off fee of 3% of the investment amount is required at the time of investment to the Manager of the Fund. 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.

 Sale at a profitSale at a loss
Initial Investment€100,000€100,000
Disposal value€110,000€90,000
Sale Proceeds (net)€108,350€88,650
Net Investment Cost(€63,000)(€63,000)
Gross Gain€45,350€25,650
Capital Gains Tax(€1,346)€0
Net Gain€44,004€25,650

Net cost of Investment Capital Gains Tax 
Amount Invested€100,000Sales Proceeds (net)€108,350
Once off Fee€3,000Amount Invested€103,000
Total€103,000Capital Gain€5,350
First tranche of relief€30,000Capital Gains Tax Exemption(€1,270)
Second tranche of relief€10,000Chargeable Gain€4,080
Net cost of investment€63,000Capital Gains Tax at 33%€1,346

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 this fund, 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 uninvested 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 30/40ths 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 10/40ths 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 10/40ths 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.