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Tax on investments in Ireland – A Plea! Blog 157

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Tax on investments in Ireland – A Plea! Blog 157

5th October 2020

Paddy Delaney

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Tax on investments in Ireland is a doozy! There is a warning often quoted in investment articles that suggest “you shouldn’t let the tax tail wag the investment dog”. Based on a recent conversation I had with a prospective client and from many emails that I get from investors, it seems that people aren’t even aware that there is a tail! This is an important part of investing and is a significant issue for many investors, so I made sure to allocate sufficient time to get to write a short piece to hammer the message home!

Under the US Influence. Tax on Investments in Ireland:

Up until recent times, the vast bulk of the financial info that we had available to us here in Ireland was US centric. The language in these articles and podcasts is all about 401ks and Roth IRAs (I know!!). They also talk about passive investing a lot and about investing in super-low fee investment accounts and having fairly straightforward tax-regime investment accounts.

Maybe that’s what is driving many Irish DIY investors to ETF’s and Passive funds. This is a natural migration and one that, provided it is done right, will likely lead to better outcomes for investors. We are big passive investing advocates here too, again, once it’s done right.

The number of self-service platforms that are now available make it all too easy to set up an account and just start firing money into a fund or stock that we saw or read about in someone’s Blog. If the investment decision is based on purely getting the lowest fee, with no consideration for the tax on investments in Ireland (not to mention the quality, diversification and performance!) this is careless and potentially very costly.

Someone that got in touch recently told me that they were saving large amounts of money regularly into a fund via one such low-cost platform. They admitted themselves that their understanding of the tax treatment of that particular investment was not great.

In my view what they are doing it totally and utterly wrong. Sure, they are getting access to a low cost fund but from a tax perspective it will likely be a total mess. I encouraged them to revisit that topic with their accountant.

Tax on investments in Ireland in a nut-shell

The tax on investments in Ireland can be broadly summaries as being either in the ‘Exit Tax’ regime or the Capital Gains Tax regime.

‘Exit Tax’ (41% tax of growth when you sell in profit, or every 8 years)

  1. Insurance company equity-based investment products
  2. UCITS
  3. Irish domiciled ETFs
  4. Non-Irish UCITS, domiciled in EU (you can be on the hook for 41% of growth AND dividends!)

Capital Gains Tax (33% tax on growth when you sell in profit)

  1. US domiciled ETFs (which we technically can’t buy from here since Jan 2018!)
  2. Direct Shares in private companies
  3. Investment Trusts (watch out for a dedicated piece on these soon!)

There are pros and cons of each and every one of the above; sometimes it’s performance, sometimes it’s costs, sometimes it’s tax treatment, sometimes it’s peace of mind. Indeed there are other options CCF’s and ILP’s and all sorts of whizz-bangery, but these are the types that most consider. Also worth noting that if you have a company, the company can invest in various options and pay a lower rate of 25%. All worth consideration.

While I always encourage keeping costs as feasible as is possible, I encourage all investors to ensure that they do so only when they have as close to certainty that the tax treatment will not be the sting in the tail in the years to come.

Tax on Investments in Ireland – How to avoid costly mistakes

The nuances of the tax of growth and/or dividends of some of the options is open to interpretation and in some cases Revenue have not confirmed how it should be treated! This makes it hard to see the wood from the trees! We do not live in the USA, we do not currently have a simple and tax efficient method of investing or saving regularly (other than pensions! Read Blog 102). Taxation is subject to change, and we all know, you can get back less than you invest in any investment.

I empathise, you just want to get invested and build or indeed preserve the purcashing power of your money – but for God’s sake don’t jump into something that will potentially hammer you in years to come, and cost you far more than the 0.5% per year you thougth you were saving!

  1. Find out exactly what structure it is and where it is domiciled
  2. Check out Revenue’s website for ‘from the horses mouth’ guidance on the tax treatment or other caveats – indeed speak to them if needs be
  3. Invest based on your goals and not on what someone said in a Blog post (yes, even this one!) or what Mr. Whizz-Bangery said will give you 10X on your investment over the next 3 weeks!

Tax on non-pension investments in Ireland is not to be sniffed at. It is less than simple. As a colleague of mine used to say; “we are where we are”.

Do your research and indeed, engage a professional before taking action.

Paddy.

Read common-sense usage disclaimer here

Pension or Savings account Blog 102

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Paddy Delaney RPA QFA APA
Investment & Retirement Income Planner