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Should I Invest in a Fund Subject to Exit Tax?

Should I Invest in a Fund Subject to Exit Tax?

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Examining a more tax efficient investment option.

Exit Tax

A lot of brokers in Ireland are currently putting clients’ personal investments (as distinct from pensions) into Life Insurance Company Products or Collective Investment Funds (UCITS) which are both subject to exit tax at a flat rate of 41%.

My clients mostly pay tax at 52%,” says one broker and therefore this is the right solution.

Yes, 41% is less than 52% but as in all things, it’s more complicated than that.

Case Study

Take Emily and Francis for example. He is a very well-paid professional, firmly in the higher rates of tax with a marginal rate of 52% (income tax 40% plus PRSI 4% plus USC 8%).

But Emily has taken a career break to look after the children. She has no earned income.

They have an investment worth €430,000. The dividend yield is currently 3%pa. Gross dividend income is €12,900 p.a.

For illustrative purposes only

Note 1

PRSI is applied at a minimum of €500 or 4%, whichever is greater to dividend income in excess of €5,000 pa. If the €12,900 dividend income is split 50/50 Emily’s share is €6,450. PRSI of €500 is due which is 7.75% of the dividend received.

No USC payable as Emily has an annual exemption of €13,000 from USC (tax year 2020).

Note 2

Emily now has all the income and the PRSI rate of 4% applies (€12,900 x 4% = €516)

Again, no USC

Contributory State Pension

As Emily is now paying Class S PRSI, and her children are over 12 years of age, she is also entitled to contributory state pension credits in respect of her PRSI payments.

Conclusion

It always pays to get a second opinion. In this example, the broker’s recommendation was costing Emily and Francis around €2,192 pa in additional income tax and around €1,600 pa more in tax on their gains.

 

Note: The Central Bank of Ireland does not regulate tax advice

 

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