Sunday Times - A Question of Money - June 5
Posted by Jill Kerby on June 05 2011 @ 09:00
Investing abroad wont pay any extra dividends
CR writes from Co Dublin: In your item headed "Canadian Option" this week you indicated that Irish income tax is levied at the highest rate on non-EU deposits. Is this also the case for dividends from non-EU companies?
The dividend payment a person receives every year (or half year) from a company whose shares they own, are already often subject to withholding tax in the country of origin. You are also obliged to pay Irish income tax on the dividend you receive but where double taxation agreements exist – or at least apply to dividends – you can claim a tax credit for the tax that was deducted at source, but only at the lower of the applicable country’s tax rates.
For example, if the foreign dividend was subject to a 25% withholding tax and you only pay 20% standard rate Irish income tax, you can claim a tax credit of 20%, not the 25%. If you pay 41% marginal rate income tax, you can claim a tax credit of 25% for the amount of tax that was deducted by the other country’s revenue authority so that you end up paying 41% tax, not 66%.
This is not a hard and fast rule, however. In the case of UK shareholdings, you cannot claim any credit for any of the 1/9th of the net dividend that is withheld by the UK tax authorities. You are also still obliged to pay your highest income tax rate to the Irish revenue on the net dividend you receive.
Seperate taxes
SM writes from Dublin: I inherited a house from my neighbour in 2006. At the time I was separated and living with my mother. I paid inheritance tax of €33,000. I recently came across an article that you wrote about capital gains tax exemptions for separated people and I am wondering if there was an exemption for me? I moved into the house straight away and am living there since.
The article to which you refer dealt with the tax treatment of inheritances between separated spouses, not capital gains tax. Wealth transfer or inheritance between spouses is entirely tax free. Where a couple has not divorced, any inheritance they leave each other is not subject to tax; the couple in question were close friends and childless.
Despite your separated status, the house you inherited from your neighbour – and not a relative - meant that you had to pay more tax on the capital value of the property than if say, you were even the benefactor’s child, sister or other relative or linear descendent. Capital acquisition tax in 2006 was 20%; today it is 27%, and the tax-free inheritance threshold between strangers is just €16,604, compared to €23,908 in 2006.
No Garuntee
KK writes from Dublin: After reading in an article by Niall Brady last week about how there are no real capital guarantee investments I went and looked at one of my own investments, a five year and 11 month tracker bond I have with Irish Life. It seems that my €100,000 capital is not guaranteed and if JP Morgan, the fund manager in this case goes bust, I get nothing.
I feel I was missold this product four years ago when I took out this investment as I wasn’t told that the guarantee is only as good so long as some bank in America doesn’t go bust. If I try to take my money out now it will be subject to early encashment clauses.
My question is, is there anything I can do straight away? If I went to the Regulator it would probably be two years before they got around to me and in the meantime anything could happen to this American bank. Any advice would be welcome even if other learn a lesson from it.
These tracker bonds are popular because they dangle the words ‘capital guaranteed’ in front of risk averse investors who also hope that at the end of the nearly six years they will also have earned a net return that what their money would otherwise earn if it was left in the bank.
Unfortunately, as you have discovered the capital guarantee only holds good so long as the institution managing your money – JP Morgan in this case – stays in business and you don’t withdraw your money before the maturity date. This is encashment penalty to which you refer. Some trackers on the market do ‘guarantee’ a small annual return, usually no more than 2%, but otherwise the profit depends on the performance of the invested index-based derivatives.
Tracker bonds are a bit more transparent than they used to be – which isn’t saying much since it is very difficult to establish the reduction in yield (RIY) after all charges, fees and commission are applied.
You shouldn’t automatically assume that the financial ombudsman is too busy to process your complaint, especially if you believe you have a cash (and evidence) that you were missold this product. Otherwise your option is to keep the bond to its maturity date in the belief that JP Morgan remains in business or encash it now and live with any loss.
One lesson to be learned from your experience is that everyone needs to be more sceptical of financial guarantees of any kind and to never invest in any fund or asset that you do not fully understand. With a sum as large as €100,000 at stake, the second opinion of a good fee-based advisor should also be sought.
For years the advisors I respect have discouraged their clients from buying expensive, opaque tracker bonds and instead recommended, if the client was still disposed to this kind of part deposit, part share investment that they place the bulk of their funds on deposit with a top interest yielding account and with the balance buy a small selection of carefully selected shares or low cost ETFs (exchange traded funds).
At the end of the five or six years, the idea was that most or all of the capital would be returned from the deposit account and the shares or funds would have produced a profit in excess of the going five year net deposit return.