As a non-dom, better to pay off mortgage or invest in the market?

[audaam]

My husband lost his job earlier this year, thankfully he's been able to secure employment again, meaning with the redundancy and other savings that we're in a position to clear our mortgage.

I've read other threads from people in similar situations which recommend doing just that. The difference in our case is that we have non-dom status, which presents an opportunity to invest more tax efficiently than otherwise would be the case here. The question is if this status changes the usual advice.

Personal details
Your age: 43
Your spouse's age: 43
Number and age of children: Two, primary school age

Income and expenditure
Annual gross income from employment or profession: 80k
Annual gross income of spouse/partner: 175k
Monthly take-home pay: ~10k (after maxing AVC's)
Type of employment: Employee (both)
Employer type: Private (both)
In general are you: Saving

Summary of Assets and Liabilities
Family home value: 1m
Mortgage on family home: 300k
Interest: 1.95% (fixed for another 4+ yrs)
Remaining Term: 22 yrs
Defined Contribution pension funds: 800k (combined total for both my husband and mine, passive global equity funds)
Investments: 65k shares (some not immediately accessible)
Cash: 350k (currently earning 3 - 3.5% interest, depending on the institution)
Total net assets: ~1.9m

Other borrowings – car loans/personal loans etc
Do you pay off your full credit card balance each month? Yes
Other borrowings: None

Other information which might be relevant
Life insurance: x4 salary via company policies

What specific question do you have or what issues are of concern to you?
We have no immediate need for the cash on deposit. We plan to stay in Ireland until we retire, at which point we will sell up, and move back to our domiciled country. We're both private sector employees, and given what happened to my husband this year, well aware that circumstances can change. That being said, we are in a comfortable position and want to set ourselves up for the future as well as we can. Should we pay off our low-rate mortgage, or invest in a global equity fund compatible with our non-dom status?

 

[Brendan Burgess]

Interest: 1.95% (fixed for another 4+ yrs)

Cash: 350k (currently earning 3 - 3.5% interest, depending on the institution)

Paying down your mortgage is borderline. With 3% gross interest, your net interest after DIRT is 2%, so you might as well keep the cash on deposit rather than pay down your mortgage.

Having the €350k gives you flexibility e.g. if you want to trade up, you would have the deposit on the new house. Even if you are not planning to do that, plans change.

 

[Brendan Burgess]

So the question is whether you should leave the money on deposit at 2% after tax or invest the €350k somewhere?

Given your age and your income and your assets, you can comfortably handle the risk of long-term equity investment.

I assume that you can invest tax-free abroad? If so, I think you should probably do so.

It should be a flexible investment so that when your fixed rate term is up, if interest rates are substantially higher, then you might want to liquidate the investments and clear your mortgage.

 

[TomEdison]

It should be a flexible investment so that when your fixed rate term is up, if interest rates are substantially higher, then you might want to liquidate the investments and clear your mortgage.

Um, if they liquidate their investments and apply the proceeds to paying down their (presumably) Irish mortgage, would that be a remittance of the investment income/gains to Ireland, which would incur a liability to Irish income tax/CGT?

On edit: There's a broader issue here. Unless I misunderstand the position, a non-domiciled taxpayer avoids income tax and CGT on income and gains earned outside Ireland, so long as they are not remitted into Ireland. OP's plan is to remain resident in Ireland until they retire (likely in 15-20 years' time, base on their ages).

They already have 800k in pension fund set aside for retirement. In order to access the non-dom tax exemption for income and gains on their c. 400k of non-retirement savings, they're effectively going to have to treat them as retirement savings as well — i.e. not access them until they retire and cease to be Irish-resident. And, if they are going to do that — treat the 400k, or some of it, as savings to be accessed only in retirement — then why not see if there is some way to put them into a pension/retirement product, to access the further benefits that come with that?

There's a trade-off between accessing the investments pre-retirement, or benefiting from non-dom tax treatment. I don't think they can do both. They can keep both options open by simply leaving the money on deposit outside Ireland and letting the interest roll up, but obviously there's an opportunity cost to that, esp. if the situation continues for 15-20 years.

In other words, to the extent that they are committed to not touching these investments until they have left Ireland, it would make sense to put them into some kind of pension product (a product chosen with regard to the tax regime of the country in which they expect to retire) or at least to put them into real assets rather than deposits. To the extent that they are not committed to this, using the investements to pay down mortgage gives a tax-free return equal to the mortgage interest rate from time to time over the next 22 years, which is likely to be better than the after-tax return they would get over that timeon a bank deposit that is remitted to Ireland before they leave.

 

[Gordon Gekko]

Ordinarily, the right answer is usually to pay down debt. But Non Doms can grow their investments tax free. So usually, for a Non Dom, it makes sense to invest. For example, in this case the hurdle rate is 1.95% and tax is not a consideration.

 

[audaam]

Our plan would be to retire at 60, all being well. We may even step back from full time employment before then, depending on circumstances, while still resident here. Leaving the money on deposit is fine for the short term, but over the course of the next 15-20 years, it would be a mistake not to put it to work.

Investing should yield a bigger return, but one of the major downsides seems to be the poor protection on offer in the EU. While we can spread the money around several banks to avail of the respective 100k deposit guarantee, it seems to be only 20k for investments. How do people manage this risk with larger portfolios?

 

[NuriaF]

Leaving the money on deposit is fine for the short term, but over the course of the next 15-20 years, it would be a mistake not to put it to work

Note that however the remittance basis doesn't apply to interests on deposits. So you will have to pay 33% DIRT tax in Ireland on the foreign interests even if non domiciled and even if the interests on the deposits aren't remitted. Same for the ETFs (41% exit tax and deemed disposal), so remember that the remittance basis doesn't apply to all types of foreign investments. It indeed applies to CGT on shares (unless they irish shares), income on dividends, rental income, for example