Podcast #48: How ETFs Are Taxed Versus Shares & Retail Investments

Hey, welcome to the latest Episode......This week we follow-up on our promise to share with you guys how ETFs are taxed here in Ireland. Like a lot of stuff these days there is a lot of info floating around about this topic, and if any of you have gone looking to get definitive answers it can prove quite tricky. We aim to bring several years of research to you in this episode, to answer most of the common questions that arise (and accept that we will naturally miss some of the less common stuff - who doesn't!).

Now this may help some of you, and it may not help, but understanding how you are taxed on your investment, pensions, savings or nest egg in Ireland is fairly vital in making informed money decisions...speaking of which please do pop over here to find out why we exist, what our purpose is and why we are Ireland's first Financial Planning & Wealth Management Blog & Podcast. Also, if you have any questions or comments we'd love to hear from you, just drop a message to us here.

In Blog 39 we took a fairly deep look at ETFs, how they work, how to buy them and what to look out for. We also raised a rather large flag to warn potential investors of the way in which 'the revenue' here in Ireland tax any income or gains you make on profits from these investment types. We are gonna address that now. We are not encouraging people to invest based on the tax treatment of something, that's never an informed decision, but we do believe it an important factor. First lets summarise the benefits & limitations of ETFs for Irish Investors:

Perceived Benefits (see blog 39):

1. Offers a transparent means to invest in a broad range of companies with 1 'share'
2. Potentially lower fees in comparison to shares and other retail investments
3. Typically 'sellable' on the day you want to sell and get your cash back (liquid)
4. Access to invest in large geographical areas (e.g US/Europe/Asia/Global)
5. Easy means of diversifying your investment within shares/stocks

Perceived Limitations (see blog 39)

1. Typically only investing in equities and not other asset classes
2. Generally no volatility control in place - if it falls it falls - if it rises it rises
3. Confusion over how they are taxed here in Ireland
4. No physical proof of ownership - no share cert - all electronic/online
5. Some ETFs are 'synthetic' - opening them up partially to potential default (counter-party risk)
6. Lack of understanding of what they are and how easy they can be to own

Other Investments:

We have covered it before but if you were to buy shares directly in a company, such as Bank of Ireland or any other stock listed on the Irish Stock Exchange (ISEQ) then it is all fairly straightforward:

1. Buy the shares through share dealer/broker (e.g Davy/GoodBody/IG etc etc)
2. Pay Stamp Duty (1%) & all other expenses of dealer (dealer collects these)
3. Get Share Certificate - you now own the shares
4. Pay Annual Mgt Charge (typically 1-3% per annum) & 'other fees'
5. If you get dividends you declare this and pay your margin rate of tax on that income
6. When the time comes you sell the shares & pay your Capital Gains Tax of 33% on any growth you achieved (above €1,270 per annum)
7. Bit Messy!

If you were instead to go and invest your money into a retail investment product, which a lot of the banks/brokers/agents sell, you are buying what is officially an 'Irish Insured Investment Fund'. These products offer you the option to easily invest into a variety of assets, depending on the fund it could be equities/ property/ commodities/ cash/ bonds or a combination of these. In this instance:

1. Invest the money with advisor/broker/agent
2. Pay 1% (Government Levy) upfront on the way in (same as with shares)
3. Pay an annual management charge (typically 1.2%-2%)
4. Do not receive dividends (if apply will usually be absorbed by fund manager)
5. When you cash your policy in (sell) the growth is subject to a tax called 'Exit Tax' at 41% which is collected by the insurance company, you have no other returns to make
6. It's simple!

How about combining the very best of both of these investments; it might look a little like this:

1. Invest the money
2. Pay zero upfront Tax/Levy
3. Get paid Dividends and pay marginal rate of tax on them
4. Pay a one transparent & low annual management fee
5. When you sell your units you pay the lower tax rate of 33% Capital gains Tax

The great news is that this can sometimes be achieved with ETFs....check out full details on Blog 42