Do you pay taxes on investments?

For many, investing can be a great way to boost your income and achieve your financial goals, but it’s important to be aware that there are risks and caveats attached to making an investment. Before you take this step, get expert financial planning advice to help you decide if investing is right for you.

Just as investing can lead to significant gains, it can also result in losses. On top of that, you should be aware that any gains you make may be subject to an assortment of taxes that will have an impact on your take-home profits. Below, we take a look at how taxes could affect your investment income in Ireland.

How much tax do you pay on investment gains?

It’s hard to give a general figure that covers all circumstances when it comes to investment taxation, because the specific taxes you’ll be required to pay can depend on various factors. For example, some forms of tax may only apply to certain types of investments, while others might not apply until an action such as selling your assets is taken. It might also matter where your assets are based – for example, a fund based outside of Ireland may be classed as a foreign investment subject to different rules.

Here are some examples of tax liabilities you might encounter:

Capital gains tax (CGT)

Capital gains tax (CGT) is a liability that must be met whenever you sell an asset. It applies to the wider financial world as well, but in terms of investments, you might need to pay CGT if you sell an investment property, stocks or cryptocurrency, for example.

CGT is charged at a rate of 33% – roughly a third – but it only applies to the gains or profits you make on the sale. So, for example, if you have an investment property that cost you €50,000 back when you bought it, and you’re selling it now for €150,000, you only pay CGT on the profit of €100,000. This would amount to €33,000.

Irish citizens are entitled to an allotment of untaxed capital gains each year; this is equal to €1,270 currently. So, assuming you haven’t had any other taxable gains in the current year for the above example, you can deduct €1,270 from your liability of €33,000 and pay a final amount of €31,730.

If you have invested in units in offshore funds, you could be liable for a higher CGT rate of 40%.

Dividend withholding tax

As the name suggests, dividend withholding tax applies to investments that pay dividends. Essentially, whenever you receive a dividend from an investment, part of the gross dividend will be deducted as tax before you receive the funds. This means you don’t actually have to do anything yourself in order to pay the tax – you just receive the net figure once the tax has been paid.

Importantly, the actual rate of withholding tax you’re liable for will depend on where the company who pays the dividend is based. The rates are subject to that country’s tax laws – so it might be different if you’ve invested in a US company versus a UK company.

Because of this, it’s vital that you check the location of the company and find out what the tax rate will be before making an investment, as it could have a big impact on how tax-efficient the decision is. Be aware also that changing exchange rates can make it harder to estimate exactly how much you’ll receive from foreign dividends.

For dividends paid from companies based in Ireland, dividend withholding tax is set at 25%. So, if you’re expecting a gross dividend of €1,000, you’ll actually receive €750.

Deposit interest retention tax (DIRT)

Deposit interest retention tax, also known as DIRT, is a levy on interest earned in bank deposit accounts for Irish tax residents. If you use an Irish bank such as the Bank of Ireland, this tax will be deducted before you receive an interest payment, meaning you don’t have to take action yourself.

However, if you use a non-Irish account, it’s up to you to declare the interest you’ve received via a tax return and then pay the tax due on your earnings. This can catch investors out if they use foreign-based tracker bonds or deposit accounts – and it’s doubly important to be aware of this because failing to pay on time can make you liable to a higher rate of DIRT.

If you pay on time, whether through your own actions or the tax being deducted before you receive your interest payment, you’ll pay a rate of 33%. Miss the deadline and you’ll be liable for a higher rate of 40%.

To show what an impact that can have, let’s look at an example. Imagine your gross interest payment amounted to €1,000. At the lower rate of DIRT, you’d be liable for €330, but if you pay up late, that rises to €400.

Although these are some of the most common forms of taxation you can expect when investing in Ireland, this list is not exhaustive. For a comprehensive and personalised review of your investment tax liability, speak to an investment consultant. This can help you to understand how you can invest to make the most of your money.

Warning:

This publication is for general information purposes and is not an invitation to deal or address your specific requirements.

Any expressions of opinions are subject to change without notice. The information disclosed should not be relied upon in their entirety and shall not be deemed to be, or constitute, advice. Although endeavours have been made to provide accurate and timely information of the various source materials, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. For guidance, seek professional, independent, advice.