How To Invest Tax-Efficiently In Ireland

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Introduction

In recent years there has been so much attention put towards beating the market by investors. Many of these investors have the sole goal of achieving maximum returns on the market by whatever means necessary and, consequently, pay no mind to how their profits will be taxed. A strategy focused on tax-efficient investments will eliminate the issue of losing large proportions of your profits and will maximize the money you earn. This article will focus on investment tactics that will help you to earn money tax efficiently in Ireland in 2021 including pensions, real estate, and other forms of investment such as the rent-a-room scheme and investments in forestry.

Pensions

The number one method of tax-efficient investing in Ireland is through pension funds. Money paid into a pension fund from an investor’s salary is not subject to any taxation in Ireland. That means that, when applied to a worker in the highest tax bracket, instead of paying €400 in tax for every €1000 earned, all €1000 could be retained when paid into a pension fund. This immediately represents a tax incorporated return of 66.67%, ignoring the capacity for this money to grow throughout the duration of the life of the pension. Additionally, it is common for most employers to match certain contributions made by an employee into their pension fund up to a certain point. The use of AVCs also allows you to contribute additional funds to your pension. The amount that can be contributed is subject to the user’s age with workers under 30 able to contribute under 15% of their salary. In contrast to this, workers over 60 can contribute up to 40% of their annual salary. It is important to note that the upper limit on contributions towards a pension per annum in Ireland is €115,000 for calculating tax relief.

Control Over Pensions

One area which may be of concern to an investor is the control they have over the investments made in the pension fund. The ability to exert control over the investments made in your pension fund varies depending on the provider and type of pension chosen.

The four leading pension providers in Ireland today are Aviva, Irish Life, Zurich, and Standard Life. It is common for these providers to allow the user to choose from a variety of pre-existing investment funds to match their risk appetite and preferences. This is the case with Aviva who offers the choice between an active investment fund, a passive investment fund, and a life-styling investment fund which automatically transitions towards lower-risk investments near the retirement date. The only pension fund provider to offer a self-administered executive pension is Standard Life. This is done by appointing Stocktrade as your execution-only stockbroker who will carry out deals and settle transactions for you. Charges do apply to this style of pension including an account charge of €90 per annum payable quarterly, 0.3% of a transaction cost, and a 1% Irish Stamp Duty. Additional exit costs and cross-border charges along with requirements for eligibility for these types of pensions are available on the Standard Life website. Registered financial advisors and pension providers such as Paul Ryan also offer executive pensions and small self-administered pensions which allow complete control of investments. Paul Ryan also allows you to invest in ETFs through your pension, a fantastic option for long-term growth.

Pension Fund

Income Tax vs Capital Gains Tax

In Ireland, an investor in the highest tax bracket is subject to income tax at the level of 40%. This means that for every €1000 earned, €400 is paid in tax. In contrast to this, capital gains tax in Ireland is at a level of 33%, meaning that €1000 earned by an investor through the appreciation of shares in a company would only be subject to a tax of €330. This represents an increase in profit after tax of 7% when profits are taxed at this lower rate of taxation. Therefore, it could be argued that a tax-efficient investor would focus on companies that reinvest their earnings to expand their business rather than paying out regular dividends to their shareholders. Additionally, opting for a long-term buy-and-hold strategy will reduce the amount spent on stamp duty. Such long-term growth investment strategies targeting capital appreciation and additional proven stock market strategies are available on the Aikido Finance website with different metrics available to suit the individual investor’s preferences.

ETF's - Aikido Blog

ETF’s 

Certain legislation in Ireland means that investments in the form of Exchange Traded Funds are not as tax efficient as investing in ordinary stocks. It is required for investors of ETFs to account for any tax owed on a gain on an ETF themselves. This means that the tax payable might vary from the capital gains tax rate to the dirt tax rate of around 41%. This depends on variables such as where the fund is domiciled and where the person is domiciled. For Irish domiciled ETFs, the tax liability is usually at the 41% DIRT rate for any income from dividends. Such taxes may be avoided by investing into an accumulating ETF which reinvests this income within the ETF as opposed to paying out dividends. Additionally, any profits made from the sale of an ETF will also be taxed at an exit rate of 41%. ETFs domiciled in the EU follow the same treatment as Irish domiciled ETFs and again are subject to the 41% tax on dividend income. For US ETFs, tax on capital gains is at a level of 33% and income is taxed at the investor’s income tax bracket along with PRSI and USC. Additionally, due to Irish legislation, even if you have not sold your ETF, every 8 years you will have been deemed to have sold it and, therefore, are liable for tax of 41% of any profits made in the last 8 years making long-term ETFs less tax efficient. Paul Ryan allows you to invest in ETFs through your pension, which is an excellent way to invest in ETFs while keeping taxes down!

If you want to manage your own portfolio, investing in stocks in a smart way will likely be more tax efficient than ETFs due to the ridiculous withholding tax. You can create a quantitative portfolio for free with Aikido Finance.

ETF - Tax efficient investment

Real Estate 

Real Estate perhaps serves as a more tax-efficient form of investment as, unlike ETFs, rental income will only be taxed at your income tax bracket. Additionally, it is possible to get tax relief on damages, maintenance, and repair costs throughout the year reducing the amount of generated income liable for taxation. It is also possible to receive tax relief on any accrued interest from the loan used to purchase the property in question. One point of note is that the sale of any property that is not considered your residential property is subject to capital gains taxation.

Rent a Room Scheme

Introduced in 2016 by the Irish Government, this scheme allows you to earn €14,000 tax-free by renting out one of your rooms as of 2021. This has increased from the initial exemption limit of €12,000 with a minimum continuous letting period of 28 days required.

Real Estate - Aikido Finance Blog

Investment in Forestry

Any profits made in forestry investments in Ireland up to €150,000 are exempt from Income Tax and Corporation Tax. Additionally, an Irish grant scheme will completely cover the initial cost of planting. What makes this form of investment even more appealing is that Ireland has one of the best climates in the world for forestry growth due to its heavy rainfall and its high-quality soil. This in turn has led to returns of 5-7% per annum on forestry investment in Ireland.

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