Smart Investing in Ireland: Tax considerations when constructing a portfolio

Navigating Investment Options and Their Tax Implications

1. UCITS Funds (Undertakings for Collective Investment in Transferable Securities):
   • These are open ended regulated investment funds that invest in a diversified portfolio of assets like stocks, bonds, and other securities. They can be managed actively or passively depending on the objective of the fund.
   • Tax Treatment: Generally subject to Funds Exit Tax (41%) every eight years and upon disposal.
   • Tax Advantages: If you choose funds under the same umbrella structure you can switch between funds under the same umbrella without triggering a taxable event.

2. Exchange Traded Funds (ETFs):
   • ETFs are a type of investment fund that trade on stock exchanges like individual shares. They often track a specific index (e.g., the S&P 500) or a particular sector.
   • Tax Treatment:
     • UCITS regulated ETFs, usually domiciled in Ireland or Luxembourg, are typically subject to FET (41%).
     • ETFs domiciled outside of the EU can fall under CGT depending on certain circumstances, however, these are not available to retail investors in Ireland.
   • Tax Advantages: While there are no major tax advantages for ETFs vs funds for the retail investor at the point of sale, there can be some benefits under the bonnet of an ETF. For example, thanks to the double taxation treaty between Ireland and the US, withholding tax on dividends from US stocks is reduced to 15% when investing through Ireland-domiciled ETFs. This compares to the 30% tax incurred within UCITS funds. This benefit shows up in the value/performance of the ETF and does not require any action from the investor.
   • Tax Disadvantages: The umbrella structure advantages that apply to funds don’t apply to ETFs meaning ETFs will always be assessed on a standalone basis for tax purposes.

3. Life Insurance Investment Products
   • These are investment products offered by life insurance companies. Your money is invested in a range of underlying assets chosen by you from the options provided by the insurer.
   • Tax Treatment: Generally subject to Funds Exit Tax (41%) every eight years and upon disposal.
   • Tax Advantages: the tax administration is usually handled by the provider.
   • Tax Disadvantages: A 1% Government Levy applies on your initial investment. Furthermore, early withdrawal penalties can be included, typically up to 5%, which can restrict your financial flexibility in the first few years.

4. Shares (Direct Investment in Companies):
   • When you buy shares, you become a part-owner of a company. Your returns come from potential increases in the share price (capital gains) and dividends (company profits distributed to shareholders).
   • Tax Treatment:
     • Capital Gains: Profits from selling shares are subject to CGT (33%)
     • Dividends: Dividends received are generally subject to income tax at your marginal rate (52% for higher rate tax payers). Dividends from foreign companies may also be subject to Dividend Withholding Tax although double taxation agreements might provide some relief.
   • Tax Advantages:
     • The CGT rate of 33% is lower than the 41% exit tax.
     • The annual CGT exemption (€1,270) can also reduce your tax liability.
     • You only pay tax when you realize a gain by selling the shares meaning there is no 8year deemed disposal.
     • You can offset gains and losses between other CGT assets such as direct property. You can also carry losses indefinitely under current rules meaning you may have existing losses from previous investments that you can offset against gains in your portfolio.
   • Tax Disadvantages
     • You are responsible for calculating and paying CGT.
     • Dividend taxation can be complex and potentially taxed at 52% for higher rate tax payers.
     • Stamp Duty: This can apply depending on where the shares are purchased. For example, this is 1% on Irish listed shares and 0.5% on UK listed shares.