Are you paying too much tax?

AUSTERITY measures introduced some years ago are still around today, and will be for some time. These measures were designed to increase the tax take on income or growth from assets held by an individual. Some examples of the increased tax treatment are summarised below:

Investors should always seek out investments that can be made in a tax efficient manner. While we believe pension contributions are still a very tax efficient way of accumulating wealth (tax relief on contributions, tax free growth, tax free lump sum at maturity) these will not suit everybody, particularly those with rental income.

There is a tax relief scheme called the Employment and Investment Incentive Scheme (EII) and was formally known as the BES scheme.

Here, an individual can invest a sum of money in a qualifying company, and get full income tax relief on the investment. This tax relief is also available for those with rental income. See typical example below:

Investment can range from about €10,000 up to €150,000. You will receive 75% of the tax relief in the year the investment is made, with the further 25% payable after year 4. For this reason most EII investments should be made on the understanding you will not have access to your investment for at least 5 years.

The scheme is intended to be a source of capital for Irish companies to help them grow the business and increase employment. For a company to be considered a ‘Qualifying Company’ they must be able to demonstrate after 4 years that: 1. The number of employees has increased, and 2. The wages paid have increased This type of investing is considered high risk, as you are purchasing shares in a small Irish company, where these shares are not traded on any stock market. This means, the most likely way for you to get your investment back, is for the Company to buy back the shares after 4/5 years. Needless to say, the company will need to be trading well to be able to re-finance the buy-back of shares, or to have sufficient capital of its own to buy-back after 4/5 years.

You can mitigate this risk somewhat by investing in more than one company, thereby spreading or diversifying the risk. There are funds designed for this purpose, where the fund invests in a range of companies, and the investor buys shares in the fund. You can gain exposure to about 10 companies using this route. The investments are still to be considered high risk.

If you would like to know more about EII schemes, of if you would like a consultation about your finances, please call Harry Crummy on (0402)32629.

Harry Crummy is a Certified Financial Planner™ and a Qualified Financial Advisor and is a principal at Efficient Financial. See www.efficientfinancial. ie for more details.