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‘Love Money’ need not be unrequited

The recent report from DCU’s Ryan Academy on Love Money (i.e. informal investment in small businesses by family and friends) garnered much attention from the media. According to the report, a whopping €275 million was invested in this way in 2011. For every €1 formally invested by venture capital funds, €5 was informally invested by friends and family.

One point which may have been missed is that the love need not be all one way. Family and friends can avail of generous tax reliefs for investing in businesses. Indeed, if the Ryan Academy’s estimates are correct, love money investors could be missing out on an eye-watering c.€113 million in tax relief.


The Employment and Investment Incentive Scheme (EIIS) is an initiative intended to encourage investment in private business. Under the scheme, investors will get a 30c tax refund for every Euro invested initially. If, at the end of 3 years, employment increases in the company, investors will get a further 11c tax refund. Importantly, the scheme specifically permits relatives who do not have a controlling interest in the business to avail of the relief.

There are some conditions. The investment must be for a minimum of 3 years. The business owners must not repay capital to themselves for 2 years before and 3 years after the investment. The investors cannot be guaranteed a return – they participate in the same way ordinary shareholders do. However, the investors’ shares can be bought back at market value at the end of the 3 years. Certain industries are excluded – for example: hotels, stock brokers, developers and financing companies.

Pension Investment

For friends considering investing, a lesser known alternative to the EIIS is pension investment. During a recession, some individuals will fear the worst and want to hang on to their cash deposits rather than invest them. However, their pension funds are locked away until retirement. For this reason, they will be more inclined to invest using their pensions. Contributions into pensions still enjoy tax relief at the marginal rate and there is no tax on income or capital gains within a pension.

Friends can use a self-administered pension to invest in a business provided they are not connected to the business by blood, marriage or employment. Outside this condition, the restrictions of the EIIS do not apply and the parties are free to agree the duration and other terms of the investment.

Some measure of formality

No matter how informal a love money investment is, it should always be documented. If the investment is in the form of a loan, a rate of interest can be agreed. Performance targets can be set and the business can be required to report to the investors regularly. Failing these, the investment should be repayable. Where the business has assets, the investment can be secured against those assets.

Business Owners

Business owners should speak to their professional advisers about introducing the added sweetner of tax relief to an investment proposal. It is recommended that an offering document is prepared for investors which outlines the background and financial position of the business and any potential risks. This is aimed at ensuring, insofar as possible, that investors go into the investment fully informed and cannot cry foul should the business fail.


Investors should note that investing in an SME during a recession is high risk. Any investment should form only part of a diversified portfolio of investments. Investors should ensure they can afford to lose their stake taking into account their current and anticipated financial circumstances. Some measure of due diligence is recommended – i.e. investigate whether there are any hidden financial, legal or tax exposures within the business.


The Ryan Academy’s report identifies love money as a fundamental source of finance for Ireland’s small businesses. Surprisingly, a large portion of investors are missing out on the opportunity to avail of generous tax reliefs. As with all things tax-related, advice from a suitably qualified and insured professional is always recommended. Any fees involved will usually be outweighed by the benefits.

A PDF version of this piece can be found here.

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