If you worked in any of these countries, you could be due a Tax Refund

A tale of two cities – how you can make a huge tax saving on your investments

By guest contributor Paddy Delaney, creator of 'Informed Decisions' - Ireland's Award Winning Personal Finance Blog & Podcast

A Tale of Two Cities, Charles Dickens' novel about Dr Manette's 18 year incarceration in Paris and subsequent relocation to London to spend time with his daughter, is apparently quite a good read.

I wouldn't know.

Someday, after I have read every investment and retirement planning book in existence, I'll get around to it!

The story is set in the build up to the French Revolution. And you could say that Ireland will soon face its own kind of revolution.
An investment revolution.

There is undoubtedly a groundswell building around the inconsistencies in how investments are taxed in Ireland and the access to various investment options.

In this blog, I'll explore the tax implications of two different types of investment options. I'll look at what an investor will pay and the net impact over the term of an investment.

It's an investment tale of two cities!

Tenuous link over with. Let's get on with the show!



City 1 - Deemed Disposal

When it comes to investing a lump sum, most people will have two options.

The first is an investment in a traditional insurance-based product, typically proposed for a minimum of five years.

These types of plans are offered by brokers and banks and carry a one per cent Government Levy on the way in.

In other words, if you invest €100,000, one per cent of that sum (€1,000) will be deducted and delivered to Revenue. Assuming no other charges or fees are applied, €99,000 will be invested.

Crucially, with this type of plan you will also be obliged to pay an 'exit tax' when you withdraw your funds. This is provided the cash-in value is higher than your initial investment.

Deemed disposals

If you do not encash your investment by the 8th anniversary, the insurance company will be obliged to take 41% of the difference between the price on that date and the initial investment.

Many believe this 'deemed disposal' tax as unfair and punitive on investors who wish to leave their investments for the long term.

I concur!

Having said that, it is important to remember that many investors are entitled a refund of their deemed disposal tax payments under certain circumstances.

Picture the scenario.

An investor pays deemed disposal tax on the 8th anniversary of their investment. Then, years later, they cash-in at a point where the value of the investment has fallen below the rate on which the deemed disposal tax was calculated. In this scenario the investor has overpaid tax and can seek a refund from Revenue.

It's startling that so many investors do not claim what they're entitled to. If the above scenario sounds like you, it's definitely worth investigating how much of a refund you're due.

City 2 - Capital Gains Tax

Let's take a look at option number two – an investment in a Capital Gains Tax (CGT) vehicle. Direct Shares or a Discretionary Investment/ Segregated account are two examples. These investments are liable to CGT at 33% on any gains achieved.

Further, when an investor chooses the CGT route they will be allowed to earn €1,270 in CGT gains totally tax free. What's more, if you are investing as a joint investment, the allowance is double!

Investors can offset losses on the disposal of other assets against gains made on a CGT investment. This is provided a gain on the disposal of that other asset would have been subject to CGT.

This can be a major benefit to people if they have losses from the sale of shares or property in the past (there's no limit on when that loss was realised, provided Revenue are notified of the loss when it's made).

Also, if an investment in a CGT route happens to be in 'gain' territory when the beneficial owner dies, the total fund on date of death passes to the estate (assuming that is where it was to go on death). There is no tax on gains payable and the total fund will go to the estate.

The Maths

Let's take a look at some euro and cents scenarios.

Let's assume, in the first scenario, that each investment is done in one person's name only. Let's also assume that the return achieved is the same on each fund and that each fund achieves an average return of six per cent over the term of eight years, and each has a fee/reduction on yield of one per cent. In reality the fee would typically be north of that in an insurance-based product, as it would on a Segregated Investment account.

In that scenario you can see a reasonable difference in the net returns of each option.

Investment type Invest €100,000 in an insurance product (Exit tax) Invest €100,000 in a CGT option
Initial investment value after 8 years @ 5% net growth €146,268 (99% invested due to 1% government levy on entry) €147,700 (100% invested at outset)
Tax payable if withdrawal at this point €19,557 €15,111
Less annual tax relief allowable on growth €0 €1,270
Net cash-in value €126,711 €133,859
Actual net return €26,711 €33,859


In the second scenario let's make the assumption that each investment runs for 12 years instead of the eight in the first scenario. As a result of this, the insurance Company are obliged to take 41% of the growth on the 8th anniversary and pay it to Revenue. The balance remains invested and continues to achieve the five per cent net return. Let's also assume that in this case each investment is done in joint names.

In this scenario we can see the significant difference that the CGT Allowance and the lower rate of tax has on the net return to an investor. It's worth noting that, if you are investing a considerably larger amount of funds, the difference becomes proportionately less as the relative impact of the annual allowance diminishes as invested sums increase.


Investment type Invest €100,000 in an insurance product (Exit tax) Invest €100,000 in a CGT option
Initial investment value after 12 years @ 5% net growth €154,732 (99% invested at outset & deemed disposal tax paid out of fund on 8th anniversary) €179,585 (100% invested at outset & no deemed disposal)
Tax payable if withdrawal at this point €22,440 (41%) €26,263 (33%)
Less annual tax relief allowable on growth (assuming this investment is in two peoples' names) €0 €2,540
Net cash-in value €132,292 €155,862
Actual net return €32,292 €55,862


The above scenarios are based on assumptions that they are a straight-forward investment, and a straight-forward and linear return rate. These things seldom exist so in reality the maths will rarely pan-out exactly like this. Having said that, it is clear to see that the CGT route carries some very handsome benefits – particularly if there is a reasonable rate of return achieved over time.

If the first scenario is London and the second is Paris, are you going to opt for the city of The Gherkin or the city of romance?