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How does Tax Relief Work on an  Employment and Investment Incentive Scheme

 

The Employment and Investment Incentive Scheme (“EII Scheme”) is a tax relief incentive scheme which provides tax relief against total income for income tax purposes to Qualifying Investors for investments in certain Qualifying Companies. The EII Scheme offers one of the few remaining income tax reliefs and is one of the few sources of total income tax relief (which includes, for example, rental income, ARF distribution income).

Under the scheme, a taxpayer who puts money into an approved EII investment can reduce a substantial portion of their taxable income for the year in which the investment was made. The maximum investment allowed from 1st January 2020 is:

  • €250,000, subject to those shares being held for a minimum period of 4 years or
  • €500,000, where those shares are held for a minimum period of 7 years.

Tax relief on EIIS investments are not subject to the High Earners Restrictions. A married couple can each obtain individual relief on an investment of €250,000/€500,000, provided each spouse has sufficient taxable income.

Please note that these examples are for illustrative purposes only. Before making any investment, you should check with your own tax advisor to determine how an investment in EIIS investment will impact on your own personal circumstances.

Example 1 & 2

Example 1 – Rental Income as Only Source of Income

Jane has a considerable unencumbered property portfolio. She has rental income of €180,000 per annum. The full amount is liable to income tax, USC and PRSI. As these are not ‘Relevant Earnings’ she cannot reduce her tax liability by making a pension contribution.

Jane requires gross income of €100K per annum to fund her lifestyle and has €80K available to invest.

She invests €80,000 in EIIS investments in 2020 across a number of different companies. She will receive the following tax relief:

Investment                                   €80,000

Tax relief given Year 1*                   €32,000

Return after Year 4                         €80,000 plus or minus investor return.

The investor return is subject to Capital Gains Tax. For the purposes of computing an individual’s liability to CGT, the purchase price of the shares will be considered to be the cost before deduction of the tax relief.

*Subject to investee company meeting certain criteria.

 Example 2 – ARF Distribution

John is 62 and has an annual distribution from his ARF of €120,000. He also receives significant investment income from rental properties, dividends and deposits that he holds personally.

His investment income funds his lifestyle and he is concerned that he has a significant tax liability on his ARF distribution.

He invests €120,000 that is distributed from his ARF in EIIS investments in 2020 across a number of different companies. The tax he pays on his ARF distribution is all at the higher rate. He will receive the following tax relief:

Investment                                   €120,000

Tax relief given Year 1*                   €48,000

Return after Year 4                         €120,000 plus or minus investor return.

The investor return is subject to Capital Gains Tax. For the purposes of computing an individual’s liability to CGT, the purchase price of the shares will be considered to be the cost before deduction of the tax relief.

*Subject to investee company meeting certain criteria.

Example 3 – Pension Funds in Excess of Standard Fund Threshold (€2M)

Tony (60) is a hospital consultant and has a HSE pension payable at age 65. He also has significant personal pension funds from his private practice income. At his review last year, the capital value of his combined pension was in excess of €2M and it was decided that it was no longer tax efficient for him to make contributions to his private pension funds.

He has income of €250,000 from his private practice. He decides to invest €150,000 in EIIS investments in 2020 across a number of different companies. He will receive the following tax relief:

Investment                                   €150,000

Tax relief given Year 1*                   €60,000

Return after Year 4                         €150,000 plus or minus investor return.

The investor return is subject to Capital Gains Tax.

*Subject to investee company meeting certain criteria.

Example 4 – Impact on Preliminary Tax Payment for 2020

John is filing his 2019 tax return and due to the Covid 19 restrictions has until 10th December 2020 to pay and file online. At this date he will pay the balance of his tax liability in respect of 2019 and his preliminary tax liability for 2020. He has invested €250,000 in a number of companies that qualify for EIIS relief.

John has the option to pay 100% of his 2019 income tax liability or 90% of his 2020 income tax liability. If he decides to pay 90% of his 2020 liability he can factor in the income tax relief from the EIIS investment in his preliminary tax payment for 2020 once the investment in the company/EIIS Fund* is made in 2020. (*subject to qualifying criteria)

EIIS Investment 2020 

 

Warning: If you invest in this product you may lose some or all of the money you invest.

This marketing information has been provided for discussion purposes only. It is not advice and does not take into account the investment needs and objectives, financial position, risk attitude, liquidity needs, capital security needs and / or capacity for loss of any particular person. It should not be relied upon to make investment decisions.

The particular tax treatment contained herein is based on Harvest Financial Services Limited’s understanding of current Revenue practice as at November 2020. Please note that the tax treatment depends on the individual circumstances of each client and may be subject to change in the future. You should take such independent tax advice as you deem appropriate.


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