In this blog post, we will lay out some top tips for any investors considering EIIS investment.
- Keep an eye on the end of tax year
EIIS investments must be made by the end of the calendar year (December 31st) to count for that particular year. Individual investments are made directly into a company – the tax certs must be sent to investors no later than 4 months after the end of the tax year.
For EIIS Funds, the investment is made into the fund before December 31st and the fund then invests into a selection of companies during the first few months of the following year.
For self-employed people, when you are completing your tax returns, October 31st, you should calculate an appropriate figure to invest to avail of a suitable tax relief.
- Invest at the right threshold for you
Investors need to be aware that there are inherent risks involved in any unsecured investment in an Irish SME. You may lose some or all of your investment. As such investors should only invest what are you comfortable a) losing and b) not getting back for the next 4 years.
Investors should look to offset this risk by working with a reliable EIIS Fund, independent advisor and diversifying their investments.
Provided you do see a return on investment, this will not be realised for 4-5 years from the time of investment. It is important to ensure that this capital is not going to be needed during this period, as you will be unable to access it.
With the coupon, as well as tax relief, the returns should outsize most investments over a 4-year period, with an estimated IRR of 12-15%.
- Do your own DD before committing to an investment?
Due diligence should be carried out on any direct EIIS investments, and we would recommend speaking to neutral advisors before committing. This can be time-consuming and carries a level of risk related to your own investment experience.
Investing in an EIIS fund reduces this burden, as the Fund Managers conduct research, carry out due diligence and make informed decisions based on the available information. These Fund Managers are experts in the space and assess many companies before deciding to invest. This means you will be getting access to the best investments and diversifying your investment, thus further reducing the associated risk. Take a look at the funds’ page to see previous investments and if they align with your beliefs and investment thesis. You can also research the team here.
- Assess the structure of the investment.
Most EIIS investments are structured as redeemable shares, or redeemable preferred shares. This means that the shareholders hold preference in the event the company fails and assets must be sold.
Redeemable preference shares are typically redeemed in exchange for a cash buyout after 4 years, which is vastly different from an ordinary equity investment.
EIIS investments can also be made as equity investments. These investments are akin to angel or venture investments.
- Consider reinvesting tax relief into the following year.
Tax relief is given at a level of 20%-50% of the investment. One method of producing a future income stream is by investing once per year in an EIIS Fund. The cost of years 2+ are reduced because you can reinvest the tax relief achieved the year before. After year 4-5, you will start to receive an income stream as the EIIS investments are repaid.
The table below outlines the cashflow of an investor using an EIIS Fund which targets 35% relief
Overview of 10 Year Time Horizon
-Total invested = €250k
-Total cost considering tax relief = €162.5k
-Total received = €325k
-Gross Gain = €162.5k
Thanks for reading. Get in touch by emailing info@eiis.fund to find out more.
