Investing is firmly on the agenda for many again, as deposits hover on the precipice of negative rates, and Reddit investors make the headlines with their Gamestop investments.
There are a number of ways of investing, but in Ireland, each can carry different costs and result in different tax implications.
Depending on the structure of the investment, different tax rules apply, and understanding the tax implications can actually guide how you choose to invest. It’s not unique to Ireland of course but before you start thinking about Apple or Tesla, it’s worth thinking about the best way to invest for you.
Buy shares directly
There are a myriad of options when it comes to directly buying a share, and if you’re looking for “execution only”, whereby no advice is given, you may want to shop around on price.
With Dutch broker De Giro, it will cost you about €2.50 to invest €1,000 in Bank of Ireland or €7 to buy €10,000 worth of shares in Ryanair.
With eToro you won’t pay any commission on buying shares but your deposits have to be converted into US dollars, which attracts a conversion fee of up to 1.5 per cent. Withdrawals also attract a flat $5 (€4) fee.
Davy, meanwhile, has a minimum fee of €14.99, or 0.5 per cent of the trade, and has a €25 settlement charge per trade for shares listed outside Ireland and the UK. It also has an account maintenance fee of €200 a year, less any commissions paid during the period.
Goodbody charges a minimum of €25 per trade, or 1 per cent up to €25,000, while a further charge of €25 applies to all US and European purchases and sales, and a €100-a-year account maintenance charge applies.
If you’re already a Revolut account holder, you can access their share trading service – although it is limited. Standard customers get one free trade a month, while those with premium accounts get five. Otherwise, a trade will cost you £1 (€1.16) each, as well as an annual custody fee of 0.12 per cent. Trades are limited to $1,000 however, and are restricted to just the New York Stock Exchange.
Tax treatment
Any gain on shares is subject to capital gains tax (CGT) at a rate of 33 per cent, but there is also an annual CGT allowance of €1,270 (or €2,540 for a couple). You will have to file a CGT tax form and pay Revenue the tax yourself.
In additional to the annual allowance, another key advantage of investing directly in shares is that should you make a loss, you can set this loss against any future gains. You must also pay tax, at your marginal rate, on any dividend income from the share you receive. In addition, stamp duty at 1 per cent applies on the sale of Irish shares. Profits on spread trading, whereby you don’t own any underlying stocks, is not liable to tax in Ireland.
Opt for an ETF
An exchange traded fund (ETF) is offered on a stock exchange like a share, but often tracks an underlying index. Some of the big names in this space are Blackrock’s iShares range, State Street’s SPDRs range, or Vanguard’s. There is hardly an investment strategy in the world that isn’t covered by an ETF today, with popular ones including tracking the S&P 500 (Vanguard S&P 500) tech stocks (Invesco QQQ Trust), dividend paying stocks (Vanguard High Dividend Yield), or gold (VanEck Vector Gold Miners).
A big advantage of an ETF is that they allow you to diversify very easily, into a wide range of investments, and they are also typically cheap to hold. For example, Vanguard’s S&P 500 fund has a total expense ratio (TER), or annual costs, of just 0.03 per cent, while the aforementioned gold ETF has a TER of 0.52 per cent. You can also expect trading fees for buying/selling ETFs. De Giro for example, estimates the annual cost of holding €10,000 in an ETF fund to be just €33.30. This includes both transaction and management costs..
Tax treatment
The tax treatment of ETFs in Ireland is somewhat complicated. And to understand it, you will need to find out where your ETF is domiciled, or where it calls “home”. As a major international funds centre, many of these will be domiciled in Ireland, such as the Vanguard S&P 500 UCITS. This will be subject to exit tax at 41 per cent, rather than CGT. This is higher than CGT and means that any losses on such an ETF also can’t be set against future gains. A similar rate of tax applies to any dividends paid out of the fund.
Moreover, as with life-wrapped products (see below), any tax owed on such ETFs must be worked out and paid to Revenue every eight years (it’s called the deemed disposal rule) – regardless of whether you’re selling the fund or not. When you do go to sell the ETF, a tax credit will be given for tax already paid.
The treatment of an EU domiciled fund, such as the French domiciled Lyxor MSCI Emerging Markets UCITS ETF, is the same. A further complication can arise if you invest in a non-UCITS EU fund. Here the Revenue says the aforementioned treatment should apply, but adds the caveat: “It is always open to an investor and their tax advisers to take a different view.”
If you’re looking for a fund that is subject to CGT, you could consider a US/EEA and other OECD-domiciled fund, as these are subject to CGT on gains. Income from such a fund will be subject to income tax at your marginal rate, while the deemed disposal rule doesn’t apply. However, the availability of such funds is limited, as Irish investors have been restricted from purchasing US domiciled ETFs since the introduction of the new packaged retail investment and insurance based products (PRIIPs) regime in 2018.
Any gains or tax owed on ETFs must be reported and paid for through a Form 11 or Form 12 by the investor.
Life-wrapped funds
This is the way many people will first start investing. Offered by the likes of Irish Life, Zurich Life and New Ireland, these funds offer a broad range of investment options. The big advantage of this approach is their tax treatment (see below). On the downside, they can be expensive.
First of all, a government insurance levy of 1 per cent applies, in addition to annual management fees, which will depend on the fund invested. If you buy from a broker you will also likely pay commission.
Annual management fees on these products will typically be more expensive than a low-cost ETF. While the products may track the same index, these funds have higher administrative costs as they take care of the tax element for you. In addition, you will pay for the advice you receive when buying these products.
For example, you can expect a broker to be paid an initial commission of between 10 and 15 per cent on a regular contribution investment product. Trail commission of about 0.25 per cent a year may also apply. Such charges can reduce the value of your investment, but may be worth it for the advice you receive.
Tax treatment
The big advantage of such funds is that when it comes to tax, there is nothing for the investor to do, as the life company deducts the exit tax owed and passes it on to Revenue before paying you the balance. Exit tax is charged at 41 per cent, although the life industry has been calling for it to be reduced to the same level as dirt tax (33 per cent).
Fund platform
The big difference here, when compared with life-wrapped funds, is that the 1 per cent insurance levy doesn’t apply. Tax treatment is also different.
You can buy shares on Davy Select, but you can also access more than 330 ETFs as well as more than 700 funds through the platform.
As with buying shares, there is a quarterly dealing fee of €50 charged for an investment account, and this is reduced by the value of any commissions incurred in the quarter (same as for buying shares).
Annual charges depend on the fund chosen, but the broker’s own range of funds, such as the GPS and Foundation range of funds, have an annual 1 per cent charge, with a minimum investment of €100.
Similarly, another option is KBC Bank, which offers a range of funds from KBC Fund Managers. It is not subject to the insurance levy, and is launching a new range of ExpertEase funds later this month. With these you can start investing from as little as €10 a month. There is an entry fee of 1 per cent on its funds, with no exit charge. Annual charges range from 1.16 per cent to 1.38 per cent depending on the fund.
Tax treatment
Most funds/ETFs on Davy’s platform are subject to an exit tax at 41 per cent. Deemed distribution is due on these funds at eight years, but unlike with life companies, it is the obligation of the individual investor to understand, calculate and declare the tax owing on each investment. However, this doesn’t apply to Davy’s own range of funds, and it also provides all investors with a “tax pack” that offers some advice. Tax treatment is the same with KBC’s fund range: existing investors in the group’s offshore fund range have to settle tax liabilities themselves. With the new ExpertEase range, which are also subject to deemed disposal, tax is settled at source by KBC.
