What Taxes Do You Pay On Investments

Are you confused about the taxes you pay on investments? What taxes do you pay on investments.

Many investors find it challenging to understand the complexities of investment taxes.

In this blog, we’ll explain different types of investment taxes, including capital gains, dividends, and interest income.

Whether you’re investing in unit linked investments, indices, stocks, bonds or real estate, this guide will help you understand your tax obligations.

So, let’s get into the details and make your investment journey smoother and more profitable!

Firstly, it is important to clearly understand the taxes you need to pay on your investments. Knowing the tax implications can help you avoid unpleasant surprises, make more informed financial decisions and potentially save money in the long run.

Here are the different types of tax on different types of investment

When you invest in stocks and shares, you can earn money through dividends or the selling the shares when they have increased in value.

There are multiple types of taxes that can be applied at different rates. This is particularly important for anyone who has taken part in company share purchase schemes like:

• Approved Profit Sharing Schemes (APSS).
• Save As You Earn (SAYE) Schemes.
• Key Employee Engagement Programme (KEEP).
• Employee Share Ownership Trust (ESOT).

All of these schemes have different tax rules that apply and it is important to know how they will impact you.

Check the information provided by your employer or book a free initial appointment with us to explore further.

Dividends are payments made by companies to shareholders from their profits. They are usually taxed multiple times.

• The Company Pays Dividend Withholding Tax (DWT) @ 25% when issuing dividends.
• The Individual Receiving the Dividend pays income tax, USC and PRSI on the dividend.
• The DWT is credited back to the individual.

Dividend Withholding Tax (DWT) Example

Personal Taxes are charged on the Full Value of the Dividend

Capital gains occur when you sell or dispose of your assets, including your stocks for more than you paid for them.

In Ireland, capital gains are charged no matter how long you have held the assets, even if you give it as a gift.

If you made money on buying and selling stocks, shares, indices etc capital gains will apply.

Personal Exemption

Each tax year, the first €1,270 of your gain or gains (after deducting losses) are exempt from CGT. You are entitled to this exemption whether you are resident or non-resident. You can’t transfer this exemption to your spouse or civil partner.

Example of Capital Gains

Capital losses occur when you sell or dispose of an asset for less than its purchase price or cost basis.

In other words, it is the financial loss you incur when the sale price of an asset is lower than the original cost. Capital losses can be used to offset capital gains. It is important to report capital losses annually.

You can also carry capital losses forward to offset against future capital gains, and you can also use your losses to offset your spouse or civil partner’s gains in a given year.

Example Capital Gains with Losses

Taxable Capital Gain – Capital losses = balance @ 33%

In Ireland, the taxation of bonds depends on the type of bond and whether it is held by an individual or a company.

There are 3 main types of bonds you can purchase. Government Bonds, State Savings Schemes (low risk, low return) and Corporate Bonds (higher risk, higher return).

Assuming you are an individual purchasing a bond the below taxes will apply when the bond matures, or when you receive income or interest.

Deposit Interest Retention Tax (DIRT) is a tax in Ireland that applies to the interest earned on savings held in deposit accounts with banks, credit unions, and other financial institutions.

It is designed to tax the returns individuals earn from their savings without requiring them to include the interest in their annual tax returns.

Money in Bank Accounts: Deposit Interest (Interest from Savings Accounts):

• Interest earned on savings in deposit accounts is subject to Deposit Interest Retention Tax (DIRT).
• DIRT Rate: Currently 33% (as of 2023).
• Banks and financial institutions deduct DIRT at source, so you receive the interest net of tax.
• Exemptions exist for people over 65 and Permanently incapacitated individuals if income is under €18,000.

This means every year you will have to complete an income tax return even if you are a PAYE employee of another company.

Only certain costs are allowable to be deducted each year. Be careful about what you try and claim as legitimate expenses.

Additionally, when you sell a property, you may have to pay capital gains tax if the property has increased in value.

For instance, if you bought a house for €200,000 and sold it for €300,000, your capital gain is €100,000. The tax on this gain would be 33%, meaning you owe €33,000 in taxes.

These are easy to access investment products typically sold through life companies (Aviva, Irish Life, New Ireland, Standard Life and Zurich)

These are communally referred to as collective investments, mutual investments, unit linked investments, or UCITS (Undertakings for Collective Investment in Transferable Securities).

You invest in a fund that owns the underlying asset (stock, bond, property etc). but you never own the asset. You own units in a fund that owns the asset. Since you don’t own the asset they are treated differently for tax purposes.

Gross Roll Up Rule

Irish investors are subject to an exit tax when they redeem or sell their fund units or when deemed disposals apply (every 8 years if they hold the units long-term).

The tax will be deducted automatically every 8 year if you take a withdrawal or not. This tax is currently: 41% on gains for individuals.

Since the life company takes care of the tax, you don’t need to file an income tax return for these type of collective investments.

Example UCIT 10 Year Investment

When you access your pension you can normally withdraw 25% tax free.

Additionally, some savings accounts might offer tax exemptions on the interest earned, providing a more tax-efficient way to save and invest. These are normally linked to state savings products like saving certificates or prize bonds.

Tax treaties are agreements between countries to prevent double taxation. Ireland has treaties with many countries, which often include provisions for tax rates.

It is important to understand the rules that apply to the type of income that is been generated in another country (employment, dividend, rental income, interest, royalites, business profits, capital gains).

It can be easy to make a mistake and not pay tax that is labile or pay too much tax.

Understanding the taxes on your investments is important for effective financial planning.

We’ve given a brief overview of the tax implications for various investments, strategies to minimise tax liability, and the benefits of tax-advantaged accounts and international considerations. 

By staying informed, you can make smarter investment decisions and maximise your returns.

For personalised advise and expert help with managing your investments, trust Greenway Financial Advisors. 

Contact us today to ensure you’re making the most of your investments and minimising your tax burden. Book your free initial meeting or call us now to get started!

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