How to limit the tax taken from your investment returns

INVESTORS could lose more than half of the money made on an investment to tax — so it pays to keep the Revenue Commissioners in mind before deciding where to invest your cash.

Some of the most heavily taxed investment products are offshore funds and dividend-paying shares. The amount of tax paid on the money made on such products could be as high as 55pc.

“The taxation rules on foreign investments can be extremely complicated and often open to interpretation,” said Paul Earley, managing director of the Kildare financial advisers, Earley Investments. “The development of online investment and trading platforms has made it easier for investors to make mistakes in this area.”

Before choosing an investment fund, understand exactly what tax bill you’ll be hit with on any money you make. The rate of tax you pay will depend on where the fund is domiciled (that is, originally based), whether or not the fund is authorised, and how the fund is structured.

A flat tax rate of 41 per cent must be paid on income or profits you make on an investment fund which is domiciled in Ireland. That same flat rate of tax will be paid on any money you make on funds domiciled in the EU, the European Economic Area (EEA) or the OECD — as long as the country has a double taxation agreement with Ireland and the funds are authorised and structured like Irishbased funds.

However, if you’re investing in an unregulated offshore fund which is domiciled in the EU, the EEA or the OECD, you must pay tax at your higher rate of income tax as well as PRSI and the universal social charge (USC) on any income you receive from the investment — even if Ireland has a double taxation agreement with the country where the fund is based. You must also pay 33 per cent capital gains tax (CGT) on any profits you make when you sell the fund.

If investing in an offshore fund which is based outside the EU, the EEA or the OECD — but which is still in a country that Ireland has a double taxation agreement with — the amount of tax you pay will depend on whether you receive most of your income from the fund each year or if the income is allowed to build up over time. If you receive most of your income from the fund each year, you must pay tax at your higher rate of income tax as well as PRSI and the USC on any income you receive — and you must also pay 40 per cent CGT on any profits you make when you sell the fund. Otherwise, you are taxed at your higher rate of tax on any money you make when you sell your investment.

The are some steps you can take to limit the extent to which the Tax Man can eat into your investment returns.

“Invest in an Irish or EU-unit linked fund where gains and income are taxed at a flat rate of 41pc exit tax,” said Earley. “Returns on these funds can be rolled up within the fund and will not be hit for tax until either money is withdrawn or the fund reaches its eighth anniversary.”

Saving more into your pension is one of the best tax moves you can make — particularly if a higher-rate taxpayer as you will qualify for a 40pc tax break on your pension contributions (up to certain limits). “Both income and growth within a pension fund are completely tax-free and the compounding effect of tax-free growth over time is very powerful,” said Earley.

You could also invest in a product with attracts a 33pc CGT rate rather than a higher exit tax or income tax bill. “There are specialist managed CGT portfolios comprised of Exchange Traded Funds and shares — where returns are subject to CGT,” said Earley. “These portfolios are complex so get advice before making any investment.”