I hold shares through Davy in a few Irish companies but rarely trade them. It’s a small holding – the total market value is currently €25k, and looking back I see that in 2018 it was €22k, so no big (paper) profits.
I’ve made a few poor choices which have weighed heavily on my holdings, but as an optimist I hang on to them.
In conversation recently, an acquaintance said that the Government charges tax on holdings as well as CGT on profits. The conversation chimed as I recall the Government discussing such a plan some years ago. I haven’t seen anything about this on my ROS account. Can you clarify please?
Mr P.W.
Optimism is not necessarily the ideal approach to investing but we’ll return to that in a moment.
The fact that there is such confusion about tax on investments is telling. And it may go a long way towards explaining why close to 90 per cent of the €168 billion in Irish household savings is sitting in demand deposit accounts earning next to zero in interest – with the Government taking a third of that by way of deposit interest retention tax (DIRT).
Whatever else can be said about the Irish tax regime around investing, it is certainly neither consistent nor intuitive.
I suspect your acquaintance is referring to “deemed disposal”. As per the literal definition of the words, it is a tax which deems you have disposed of your investment even though you have not. What an Irish construct.
It is one of the issues that is addressed in the Funds Sector 2030 report, looking at factors holding back Ireland’s funds industry and how to get more Irish people investing in a wider range of products, which has been sitting on the desk of Minister for Finance Paschal Donohoe and his predecessor Jack Chambers for the guts of a year.
There had been an expectation that Budget 2026 might address some of the issues raised in the report, including deemed disposal but, in the end, the Minister pulled his punches and opted for a “roadmap” to be published early next year, “setting out my intended approach to simplify and adapt the tax framework to encourage retail investment”.
This, the Minister said at the time he was presenting the budget last month, reflected “the complexity of the tax framework for retail investment”.
Indeed.
Deemed disposal means that every eight years after you make your investment, Revenue steps in and taxes any gains you have made. And while this exit tax, as it is called, was originally set at a rate three percentage points above the capital gains tax rate – itself 20 per cent at that time – to compensate Revenue for not taking gains annually, it has since risen to its current level of 41 per cent.
That is clearly prohibitive. Exit tax kicks in every eight years and when you actually dispose of your investment. A further disincentive is that, unlike capital gains which used to apply to such funds, you cannot offset gains in one investment with losses incurred on another though if your funds suffer a setback and fall below a level you have already been taxed to, an adjustment will be made.
The small sop the Minister did make to the industry in the budget was to announce that the 41 per cent rate of exit tax will fall to 38 per cent in January. But it is still five points above a capital-gains tax rate.
The good news for you is that it does not apply to direct stock market investment – the sort of direct purchase of shares in individual companies that you have been doing. It applies to pooled funds, such as unit funds and exchange traded funds (ETFs), even though the latter are traded on the stock exchange.
That means you do not have to worry about it as long as those shares you have acquired through Davy are not an ETF.
Direct investment in shares is subject to the general capital gains tax regime so you do not have to worry about tax until you actually sell one of your holdings. At that point, you will be taxed on the capital gain, minus the first €1,270 in any year.
And, as I said, unlike exit tax, if one of your shareholdings is sold at a loss, you can offset that loss against gains made on other asset sales in the same year before assessing any capital gains tax liability. As of now, capital gains is taxed at 33 per cent though that could change between now and whenever you were to sell.
So, on the tax front, your friend’s concern are not an issue.
Investment
However, you might want to look at your investment approach.
You say your holding in Irish shares is worth around €25,000 now, up from around €22,000 in 2018. I have to tell you that’s a miserable performance.
Basically, taking June 2018 as your starting point, your investments have gained 13.6 per cent over the past seven-plus years – equivalent to an interest rate of around 1.8 per cent annually.
Inflation has been running 10 points ahead of that over the same period – 23.6 per cent – so the money you have invested is actually losing value over those past seven years.
And your 13.6 per cent gain pales into insignificance next to the 67 per cent rise in Dublin’s Iseq overall index over the period from mid-June 2018 to Friday. It looks worse when compared to the US Dow Jones 30 – up 86 per cent – and even the underperforming FTSE 100 which is 24.6 per cent up over the period.
You do concede you’ve had a couple of poor calls that have undermined your returns. There are a couple of things to note here.
First, the Irish market is a very small place in investment terms, with few companies of any real scale by international stock market standards. It has not been able to attract new listings and many of its biggest constituents have been taking their business elsewhere – such as CRH, Paddy Power, Smurfit Westrock and even Greencore and Grafton.
If you are limiting yourself to Dublin, you will not have much choice of investment.
Even if all those companies were still on the Dublin exchange, Dublin would be a tiny dot on the stock market landscape. A balanced portfolio of stocks really should not be limiting itself to the Dublin market if only to allow for the disproportionate impact of local economic and other factors.
Second, stock picking – i.e. actively investing in a small number of individual stocks as you are doing rather than passively investing in a fund that reflects a market or markets – has made a fool of some of the brightest and most engaged minds in the investment sphere. It is an exceptionally difficult game and not wildly different from betting on a horse in the 3:15 at Gowran Park.
For every Nvidia, Apple or Microsoft, there are many turkeys such as, in the Irish market context, Datalex.
Apart from your own entertainment, as an approach, it has little to recommend it. In fact, that Funds Sector 2030 report argued specifically that the Government’s approach to taxing funds serving investors poorly by was actively and unwisely encouraging people to go the stock-picking route.
It might be time for you to sit down with a financial adviser to look at your investment strategy. Changing to funds will alter the tax rules but, even with that, you would expect better returns than you’re seeing now.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street Dublin 2, or by email to dominic.coyle@irishtimes.com with a contact phone number. This column is a reader service and is not intended to replace professional advice