Tax and online trading houses, not CGT but income?

[mr_pinstripe]

I've asked myself the following question and tried to come up with an answer. I've given my 'workings' to date but I'm not sure if i've got it right. I'd be grateful if you would have a look and make some observations.

Part 1: THE QUESTION:

Q. If a person buys shares with keytrade.com (or another online house) and they gain, how much will they pay in tax? Does the person pay 20%, 23% or 45% of that gain, in tax (to Ireland)? Does the person also pay tax to the national authority of the online house?

PART 2: REASON FOR QUESTION:

I've had a look at keytrade.com and the other execution only online share trading accounts, as mentioned by your contributers. They seem to be both better value than Irish traders and to be secure. However I have concerns regarding the revenue implications, which might wipe out any benefits from their lower transaction costs.

Wouldn't putting money in these trading accounts (or any ETFs or mutual funds or shares bought and held in such an account) be classified as offshore? While holding an offshore account is not illegal (although it seems you must declare it) it appears that a special tax regieme will apply to it.

PART 3: MATERIALS:

The following indented text is a quote from a [broken link removed]
The three most common errors made in calculating tax due are:

...
3. The increase in value of offshore investments and bonds is liable to Income Tax and not Capital Gains Tax. There is no annual exemption on the increased value and indexation does not apply.

And also:
Q: My money is in an offshore fund. What is the tax treatment?

A: A tax charge arises on any payment out of the fund, if the fund has risen in value. Unless the fund pays out over 85% of its income every year and is certified by the Irish Revenue Commissioners as a distributing fund, any increase in its value is treated as your income in the tax year when you receive a payment (not as a capital gain) in the tax year when you receive a payment from the fund, and is taxed at your marginal rate of income tax, plus levies and PRSI as appropriate. If the money invested in the fund was not declared and taxed, it is taxed in the appropriate tax period. [my emphasis]



PART 4: ATTEMPT AT ANSWER

keytrade.com is based in belgium/luxembourg, other online houses are based in other countries. Thus, as they are not in Ireland they could be classified as 'offshore'. Income/growth on offshore investments is taxable (it appears) on an 'income' rather than CGT basis. Therefore '20%' would be the wrong answer.

I would imagine that if you (for sake of argument a single person) earned less than the threshold figure €29,400, your investment growth would be taxed at 23% ( 20% std rate income tax + 3% prsi). If your income is over that threshold then at the surplus (which for present purposes I take as your online share trading investment growth) would be 45% (42% marginal rate + 3% PRSI)

However the quote from the revenue says 'marginal' rate, so does that mean than even if your total income was below the €29,400 threshold (single person) one would still pay the 45% on any growth on shares puchased with on online (and offshore) trading house?

Wouldn't this be more costly in the long run than just using an Irish broker?

What do you make of this?


Part 5: MY SOURCES OF INFORMATION
Revenue website: [broken link removed]
Tax rate info: http://www.finfacts.com/taxfacts.htm#incometax

Part 6: DISCLOSURES
I'm not connected with any stock brokers, financial services providers etc.
I claim no knowledge of tax matters.

 

[ClubMan]

This must be one of the most comprehensively laid out questions I've ever seen on AAM!

Part 1: THE QUESTION:

Q. If a person buys shares with keytrade.com (or another online house) and they gain, how much will they pay in tax? Does the person pay 20%, 23% or 45% of that gain, in tax (to Ireland)? Does the person also pay tax to the national authority of the online house?

They normally complete a US W8-BEN form when opening the online trading account which exempts non residents from any witholding taxes. Then they are simply liable for Irish taxes - e.g. income tax at their marginal rate on any dividends paid out and CGT at 20% on any gain arising from the sale of shares (less allowances and allowed expenses etc.). These taxes must be declared unilaterally by the individual.

I've had a look at keytrade.com and the other execution only online share trading accounts, as mentioned by your contributers. They seem to be both better value than Irish traders and to be secure. However I have concerns regarding the revenue implications, which might wipe out any benefits from their lower transaction costs.

Online brokerages are usually cheaper than Irish ones. This may not be such a big deal if you are buying and holding long term rather than trading frequently (a good way, some would argue, to simply lose money through trading costs). The tax implications are no more complicated than if you bought the shares through a local broker (other than converting calculations from US$ to € for example). You must weigh up the risks of holding your shares electronically rather than in paper certificate form or in a personal CREST account. See the FAQ in the Savings & Investments forum for more on this.

Wouldn't putting money in these trading accounts (or any ETFs or mutual funds or shares bought and held in such an account) be classified as offshore? While holding an offshore account is not illegal (although it seems you must declare it) it appears that a special tax regieme will apply to it.

Nothing illegal in this as long as you declare for dividend income tax and CGT where applicable.

PART 3: MATERIALS:

The following indented text is a quote from a [broken link removed]
The three most common errors made in calculating tax due are:

...

I'm pretty sure that the "offshore" issue is irrelevant here.

 

[mr_pinstripe]

Thanks that makes things a little clearer.

I'll have to think up another lot of questions to ask, although I'll be more concise next time

 

[ClubMan]

although I'll be more concise next time

No need - the more relevant detail the better. Your question was a model one in this respect.