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Should I invest in a fund subject to Exit Tax? Thumbnail

Should I invest in a fund subject to Exit Tax?


A lot of brokers in Ireland are currently putting clients personal investments (as distinct from pensions) into Life Insurance Company Products or Collective Investment Funds (UCITS) which are both subject to Exit Tax at a flat rate of 41%.

"My clients mostly pay tax at 52%" says one broker and therefore this is the right solution. 

Yes, 41% is less than 52% but as in all things its more complicated than that.

Take Mary and Joe for example.

He is a very well paid professional firmly in the higher rates of tax with a marginal rate of 52% (income tax 40% plus PRSI 4% plus USC 8%) 

But Mary has taken a career break to look after the children. She has no earned income.

They have an investment worth €430,000. The dividend yield is currently 3%pa. Gross dividend income €12,900pa


Mary owns 100% Joe owns 100%  Jointly owned
Exit Tax Investment 41% tax on income and gains 41% tax on income and gains 41% tax on income and gains
Portfolio of securities Income taxed at 24% (see note 2)
Gains taxed at 33% above €1,270pa
Income taxed at 52% gains at 33% (exemption of €1270pa) 50% income taxed at 52%
50% of income taxed at 28% (seen note 1)
Gains taxed at 33% above €2,540pa





For illustrative purposes only

Note 1 

PRSI is applied at a minimum of €500 or 4% whichever is greater to dividend income in excess of €5,000pa. If the €12,900 dividend income is split 50/50 Mary's share is €6450. PRSI of €500 is due which is 7.75% of the dividend received. 

No USC payable as Mary has an annual exemption of €13,000 from USC (tax year 2020)

Note 2

Mary now has all the income and the PRSI rate of 4% applies (€12,900 x4% =€516) 

Again, no USC

Contributory State Pension

As Mary is now paying class S PRSI, and her children are over 12 years of age, she is also entitled to Contributory State Pension credits in respect of her PRSI payments as set out in our tax guide below

Conclusion

It always pays to get a second opinion

In this example the broker's recommendation was costing Mary and Joe around €2,192pa in additional income tax and around €1,600pa more in tax on gains.


The Central Bank of Ireland does not regulate tax advice