# How does the Budget affect investment strategy?



## Brendan Burgess (15 Oct 2013)

Savings through a pension fund very uncertain as the Minister can't keep his hands off pensions 

Deposits and funds hit hard with increase in Dirt and Withholding tax 

Shares relatively more attractive - no increase in CGT 

CGT exemption on Investment property extended by a year.


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## Steven Barrett (15 Oct 2013)

It's certainly one way of getting people to spend, punish them for saving. There is real trouble brewing not far down the road when people realise that they have no/ not enough money for their retirement. 

But what do this government care. They are all in their 60's now and will be well gone by the time it hits the fan.


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## ashambles (15 Oct 2013)

Also the tax on funds may affect decisions - all of them are gone up to 41%.


> With effect from 2014, I am introducing a new higher single unified rate of 41% for DIRT and the exit tax that applies to life assurance policies and investment funds.
> The previous differential rates based on payment frequency will no longer apply. This measure will incentivise investment and spending in the economy, which is vital for the creation of jobs.


Previously funds where tax was paid at the end were taxed at exit (or after 8 years) the tax rate was 36%, funds where tax was paid annually were taxed at 33% (roughly 10% less in tax). 

This could mean that despite the hassle of paying tax yourself funds like Rabobank's are now more attractive than funds where the tax is handled for you. All else being equal you should get slightly better returns from a fund which isn't taxed annually.


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## Marc (15 Oct 2013)

There is an old saying that you; "should not let the tax tail wag the investment dog"

But Brendan makes some interesting observations here and we will certainly be changing the construction of our client portfolios as a result of this budget.


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## Brendan Burgess (15 Oct 2013)

Hi Marc

Fully agree with you about dogs and tails, but if you are going to invest in equities, this tilts the balance towards direct investment.  

Funds subject to exit tax are less attractive now. 

Pensions are hugely less attractive due to their increased uncertainty. 

I have to say the 7 year CGT exemption on property is looking increasingly attractive. I would say a lot of people with money on deposit will put it in property now.


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## Brendan Burgess (15 Oct 2013)

Where should 20% or 0% tax payers put their savings so that it will be subject to income tax at the lower rate rather than DIRT at 41%? 

Maybe a Credit Union account if the rate is ok? 

Brendan


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## Marc (15 Oct 2013)

Brendan Burgess said:


> I have to say the 7 year CGT exemption on property is looking increasingly attractive. I would say a lot of people with money on deposit will put it in property now.



This reminds me of when British Chancellor Nigel Lawson announced that in 6 months time he was going to abolish double mortgage interest tax relief and everyone rushed out to buy a property with their mate. 

Property prices in the UK collapsed in the early 1990s as a result. 

I remember we sold a street of terraced houses in Manchester for £1

Same thing will happen here again despite the fact that the last bad experience in property in Ireland was only 5 years ago.


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## Brendan Burgess (15 Oct 2013)

Hi Marc 

We don't allow speculation about house prices on askaboutmoney! 

But we can talk about house prices in the past. This CGT exemption was expected to end this December but there does not seem to have been a rush to buy property as a result of this. There is high demand for property at the moment, but I have seen very little reference to the Dec deadline. 

It would be a factor pushing up prices, but only one of a number of factors affecting prices. 

Likewise, I suspect that there were many issues affecting the price bubble in the UK in the early 90s. Did it start the day after the announcement and stop exactly 6 months later?


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## marathonic (16 Oct 2013)

I imagine that the vast majority of higher earners excess cash ends up in investments as opposed to cash deposits. Hence, a 20% rate for lower earners may result in too low a proportion of total deposits in the country netting the government the current, excessively high, rate of DIRT.


Sent from my iPhone using Tapatalk - [broken link removed]


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## Brendan Burgess (16 Oct 2013)

I have moved the very specific question about where should low earners who don't pay 41% income tax put their deposits here 

Where should low earners put their deposits now?


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## LDFerguson (16 Oct 2013)

DerKaiser has done some very interesting calculations in this post.


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## ashambles (16 Oct 2013)

> There is an old saying that you; "should not let the tax tail wag the investment dog"


Normally I'd agree that tax considerations shouldn't be the deciding factor in investing but let's say you've 2 identical funds one taxed at exit and one yearly.

Over a period of years 100k investment goes to 150k then down to 100k then 150k again. (Not a million miles from how many Irish pension funds performed over the last few years.) 

The fund owner who's taxed at exit is left with 129500.

The fund owner who's taxed yearly could be left with 112360. 
(Fund goes to 150k is taxed down to 129.5k, then falls back 33% to 87k, and this then grows 50% to 130k which is taxed down to 112k.)

I think it is difficult to justify investing in an annually taxed volatile fund because it's likely the tax rate will produce deposit like returns from even well performing funds.    

Thinking about this a bit more, I'd guess what will happen is 41% will be charged on annually taxed funds, and 41%+PRSI will be charged on funds where tax is paid at exit time.


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## TRS30 (16 Oct 2013)

Brendan Burgess said:


> Savings through a pension fund very uncertain as the Minister can't keep his hands off pensions
> 
> Deposits and funds hit hard with increase in Dirt and Withholding tax
> 
> ...



Revisiting overpaying the mortgage could be an option.


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## Brendan Burgess (16 Oct 2013)

If anyone  would  like to feature as a case study for a journalist about how the Budget is making them think about their savings or investments strategy send me a PM.

Brendan


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## marathonic (16 Oct 2013)

Personally, I live in a border town and purchased an undervalued house in Northern Ireland at the end of last year - I know it was undervalued because there was two bank valuations done, both resulting in higher valuations than what I paid.

Since then, house prices have risen a little in Northern Ireland and I'd been considering selling the Northern Ireland property to fund both a rental property and a PPR in the Republic of Ireland.

The CGT and DIRT rates in the Republic are a significant factor in me reconsidering these plans, in addition to the significantly lower mortgage interest rate I'm on when compared to the Republic's best buy rates.

In Northern Ireland, an ISA can be used to purchase shares/funds up to the value of £11,520 per year, rising with inflation. The shares/funds within the ISA will be except from CGT. Also, you can use up to half the annual allowance for cash deposits, the returns from which, are tax-free.

In addition, you have an annual exception from CGT for gains of up to £10,900 outside the ISA. This compares to €1,270 in Ireland.

With this in mind, I'm seriously considering holding off on plans of moving back to the Republic of Ireland.


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## RichInSpirit (16 Oct 2013)

I hope they forgot to tax the spread betting.


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## Bronte (17 Oct 2013)

Marc said:


> This reminds me of when British Chancellor Nigel Lawson announced that in 6 months time he was going to abolish double mortgage interest tax relief and everyone rushed out to buy a property with their mate.
> 
> Property prices in the UK collapsed in the early 1990s as a result.
> 
> .


 
As we're allowed talk about the past, I don't understand you linking the change in mortgage interest tax relief with a property collapse?

___________

In relation to investment stategy, I'm looking at selling to crystalise a loss, and purchasing again to take advantage of CGT. It's a great incentive. The loss I may use in the future if I sell something that would not be CGT exempt. Only problem the property at a loss has a cheap mortgage, and don't know if bank will allow me new mortgages. 

Glad I used cash on deposit this year to repay home mortgage. Decided I'd had enough of waste of time interest rates. Plus I got a great deal on a new home mortgage. Dirt tax increases can only be designed to disencourage savings. I don't think it will stimulate people purchasing, rather it will make people pay down debt. 

Glad I don't believe in pensions as I've never been fully able to understand them. OH has a DB, ie the rolls royce type, but glad he's not in Ireland, there would be riots here if the government here tried to tax the actuall underlying fund, which is coming out of taxed income (if my understanding is correct)


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## ronaldo (17 Oct 2013)

TRS30 said:


> Revisiting overpaying the mortgage could be an option.


 
With the absolute cheapest present mortgage rate that I can find costing 3.85%, one would have to have significant gains before the benefits of investing would outweigh those of paying down the mortgage - given current CGT and DIRT rates.

I read an opinion on one of these threads where the poster thought that banks could need re-capatilised given the liklihood of people withdrawing money from deposit accounts. However, I believe that the withdrawal of deposits could be more than made up with the overpayment of mortgages over the next couple of years.


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## TRS30 (17 Oct 2013)

ronaldo said:


> With the absolute cheapest present mortgage rate that I can find costing 3.85%, one would have to have significant gains before the benefits of investing would outweigh those of paying down the mortgage - given current CGT and DIRT rates.
> 
> I read an opinion on one of these threads where the poster thought that banks could need re-capatilised given the liklihood of people withdrawing money from deposit accounts. However, I believe that the withdrawal of deposits could be more than made up with the overpayment of mortgages over the next couple of years.



When the government say they are increasing DIRT etc to encourage saving they might really mean to encourage paying down of debt!


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## Roisinb (20 Oct 2013)

With the Bank Guarantee gone, does this affect deposits?


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