What is Investment Tax Diversification?

When it comes to your income and investment returns, it’s not only what gross investment return you generate that’s important, but what you keep after taxes that really counts.

And in the current environment, with higher income, capital gains and inheritance taxes, being mindful of investment tax is more important than ever. According to recent research by Irish Life, more than half of people with deposit accounts are dissatisfied with the returns on their savings. This is hardly surprising given that interest rates are at the lowest levels in a generation, and likely to remain low for the foreseeable future, whilst deposit interest retention tax (DIRT) is prohibitively high at 41%.

Wherever you ultimately decide to invest your hard earned savings, one area you need to familiarise yourself with is the tax treatment of your pension and investment portfolios, and to understand whether there’s anything you can do to mitigate your potential tax exposure. Holding your investments in different accounts based on tax treatment (such as income tax, capital gains tax, gross roll-up, EIIS, pensions etc.) can add value by allowing you to defer, reduce or entirely eliminate your tax liability. We always encourage our clients to utilize the various tax efficient structures to them, as they can add an additional layer of diversification to their portfolio.

We call this element of a client’s portfolio “investment tax diversification.”

What tax holding structures are available to investors?

Income Tax:

Some investors may face tax bills of over 50% on income earned from their investments and property rental income. However, this may not need to be the case for all investors. If as an individual or a couple, you are not currently utilising all of your income tax bands or annual tax credits, then it may be worthwhile actively seeking out an investment that pays regular income. For example, a retired couple with combined pension income of €35,000 pa may only ending up paying a rate of 20% in income tax from an investment portfolio. This is certainly more attractive than the 41% DIRT & PRSI rates on deposits.

Capital Gains Tax:

Capital Gains Tax (CGT) is a tax on the profit (capital gain) from the disposal of an asset owned by you. It is the gain you are taxed on, not the total amount of money you receive (the consideration). You do not have to pay CGT on all capital gains. The current rate is 33%.

An important consideration for some investors is the availability of capital losses. Let’s take the scenario where you may have sold a property or shares at a loss some years ago. You can currently make a gain on a new investment (up to the same amount you lost previously) and pay no capital tax whatsoever. Timing is important though. A loss that crystallises in 2016 cannot be used to shelter a 2015 gain. Losses must be realised either in the year of the gain, or in an earlier year. In addition, once you have “used up” those losses, you can crystalize a certain amount of gain every year (€1,270 per person, €2,540 per couple) and still pay no tax, an exemption which doesn’t exist under any other tax structure.

Investing through a Mutual Fund:

An advantage of investing via a Mutual Fund with a life insurance company is that the income and gains accrue tax free within the fund. The investor will ultimately pay 41% withholding tax/exit tax but this is only due on encashment or on the 8-year anniversary of the investment.

The gross roll-up and compounding effect of returns within the fund can make this an attractive holding structure for many from a tax perspective.


Rather than invest directly, it’s also worth considering investment through a pension fund. A pension is still the most tax efficient way to invest. Diverting earnings into a pension fund will save you income tax on the contributions and also allows your investment to grow tax free.

Employment and Investment Incentive Scheme (EIIS):

The EIIS is a tax relief incentive scheme, which enables investors to deduct the cost of their qualifying investment from their total income for income tax purposes for investment in qualifying small to medium sized companies. EIIS is one of the few remaining sources of total income relief. An individual with a taxable income liability in the year the EIIS investment is made can obtain tax relief from the following:

  1. PAYE earnings
  2. Rental income from property held in a personal capacity
  3. ARF distribution income

Tax relief is available in two tranches: an initial 30% in year one with a further 10% when additional criteria are met in year 4. Investments are made in suitable, unquoted qualifying companies.

My advice is simple – tax is a cost that you can’t ignore, however prior planning can often help to avoid future pain. While you shouldn’t let the taxation structure be the main factor which influences your investment decision, it certainly warrants due consideration.

Gerard O’Brien LL.B LL.M CFP® QFA is a Certified Financial Planner and the Owner of Heritage Wealth, a Financial Planning practice based in Main Street, Midleton, Cork. For more information, contact Gerard at gerard@heritagewealth.ie www.heritagewealth.ie

Disclaimer: All data and information provided within this article is for informational purposes only. Heritage Wealth Management Limited makes no representations as to accuracy, completeness, suitability, or validity of any information and will not be liable for any errors, omissions or delays in this information or any losses, injuries, or damages arising from its use.