In this second of two articles that we have written about the role tax plays when investing in Ireland, we are going to explore a few themes as to how the taxation impact can be minimised through wise understanding of the tax environment for investors.

In our last piece titled The tax considerations when investing in Ireland, we included a snapshot of some of the main investment opportunities available to investors, and the tax rates that apply to each of them. Now we want to put that knowledge to good use and set out a few areas to consider, when you are appraising different investment opportunities.

We want to remind you that it is our belief that investments should firstly be assessed based on their underlying characteristics in terms of the potential return and associated risk, and how they fit into your overall investment strategy or financial plan. That said, maximising tax efficiency can be an important way of increasing your net returns, so the tax implications of any investment should also be considered once you have concluded that the investment is worthwhile and suitable for you.

We also want to state again the importance and value of getting bespoke advice from a tax expert in relation to your specific circumstances, particularly when doing estate planning or if considering specific or complicated tax-driven investments. We have touched on a few tax avoidance strategies below, but bespoke advice that is specific to your own circumstances is critical.

Seek out Tax-Efficient Strategies

These might come in several different forms. Some examples that we frequently see include,

  • Tax-Loss Harvesting: There are techniques available to offset capital gains with capital losses, to reduce taxable income.
  • Capital Gains Tax (CGT): A clear understanding of the CGT allowances and strategies available are important to manage CGT liabilities.
  • Dividends and Deposit Interest Retention Tax (DIRT):  There are strategies available to manage and minimise taxes on dividends and interest income.
  • Choose Tax-Efficient Funds: Several criteria should be considered when selecting between the different tax-efficient mutual funds and ETFs that are available to Irish investors.
  • Qualified Investment Funds (QIFs): Tax advantages may arise when investing in QIFs as opposed to other fund structures.

Understanding Time is Important

Firstly, it is crucial to recognise the benefits of long-term vs short-term investments under Irish tax laws. A good example of this is that CGT only becomes due when gains have been realised.

Also, careful year-end tax planning around your portfolio and financial plan is important before the end of the Irish tax year to maximise tax benefits. Opportunities that may arise include,

  • Income tax relief on pension contributions.
  • Employer contributions to pension funds do not incur income tax / BIK in the hands of the employees and are usually a tax deductible employment expense for the company. Under the current tax code, the opportunity exists for business owners to make contributions to a Personal Retirement Savings Account (PRSA) up to the standard fund threshold of €2million.

Pension planning is probably the easiest way of accumulating savings from pre-tax earnings. Pension investors can accumulate a fund of up to €2million tax effectively, of which 25% can be taken at retirement. Of this, €200,000 can be taken tax free, and up to another €300,000 at a 20% tax rate. The tax benefit of this is that up to €440,000 is received, with only €60,000 paid in tax – a 12% effective tax rate.

Estate Planning Considerations

The Capital Acquisitions Tax (CAT) environment is quite penal in Ireland today, with people receiving inheritances being subject to low tax threshold amounts and a 33% tax rate. For example, the threshold for gifts / inheritances to a child is only €335,000, above which CAT is payable. There are several strategies that can be deployed to minimise this tax take, but they require careful planning.

Gifting assets to family members or charities before death, can provide tax benefits to the recipients under Irish law. Using the Small Gifts Exemption, €3,000 p.a. can be gifted by each parent to each child. This generates a potential CGT savings of €20,000 per child over a 10-year period.

In addition, there may be an opportunity to use trusts to manage and reduce estate taxes efficiently. For example, the transfer of shares in a high growth company to children or into a family trust at an early stage might be considered, to avoid a potential double tax of CGT when sold and CAT on the transfer of the proceeds to the children at a later stage.

Common Mistakes to Avoid

From our experience, three of the most common tax related mistakes when investing to be avoided include,

  • Frequent Trading: High turnover rates can increase taxable events and reduce net returns.
  • Ignoring Tax Implications of Fund Distributions: It is necessary to understand how distributions from mutual funds and ETFs can affect your tax bill.
  • Neglecting Tax-Advantaged Accounts: Investors often fail to take full advantage of pensions and other tax-efficient investment vehicles.

It is very important to stay abreast of Irish tax law updates, as changes to the tax code and / or the introduction of new taxes / regulations can impact investment strategies in Ireland. As stated earlier, personalised advice from a tax advisor or financial planner will help you ensure you are considering the current tax environment.

What are the Key Takeaways?

To leave you with some key takeaways, we suggest you carefully consider the following,

  • Have a plan.
    • Work with a financial / investment adviser on your financial plan, and consider also getting input from a tax adviser or accountant, to incorporate tax planning into your overall financial & estate planning.
    • Identify the opportunities well in advance.
    • Consider and assess whether the tax mitigation strategies are for you, in the context of your overall financial objectives.
  • Think about maximising your pension contributions.
  • If you are a business owner, carefully consider the benefits of Entrepreneur / Retirement relief.
  • Consider the benefits of personal / family holding companies.
  • Consider the benefits of family trusts.
  • Remember the €3k annual small gift CAT exemption.