Budget 2024 should streamline investment taxes, says broker Davy

Budget 2024 should streamline taxes on financial investments to boost portfolio diversity and cut risks, says stockbroker Davy.

The Dublin-based firm believes that different methods of taxing various types of investment influence investors’ behaviour and hamper individuals’ efforts to spread their risk by putting their cash into a more diverse range of products.

“Failure to adopt diversification can have a substantial impact on the risk and returns experienced by retail investors, whether through their pension or other investments,” says Davy’s pre-budget submission to Michael McGrath, Minister for Finance.

“The tax treatment in Ireland does not favour diversification and fund-based investments compared to direct investment in individual securities,” the document adds.

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The firm notes that this applies to both the different rates applied to different investments and to the overall complexity of the system for taxing them.

This prompts investors to consider investments other than funds, such as property, according to the brokerage.

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This contributes to competition for housing between those seeking to buy their own home and individuals looking to buy for investment purposes, driving up prices and leaving retail investors over-exposed to property.

EU studies have ranked the Republic second highest among 20 member states for secondary property ownership and found the country also has the second highest proportion of landlords amongst those who own a second property.

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Davy argues that harmonising investment undertaking tax (IUT), deposit interest retention tax (DIRT) and capital gains tax (CGT) would remove disincentives to investing in funds and other measures that enable investors to diversify their holdings.

The firm also maintains that it is essential that the State tax life policies at the same rate as other regulated fund investments.

Its submission points out that over the last 15 years, new regulations have increased protections for those investing in funds in the EU, whose investor protection regime is now recognised globally.

“It would be inconsistent for Irish domestic tax policy to tax investors accessing this regime at a rate which is less favourable than that applied to life policy investment,” it states.

The firm says its shares concerns raised in a Department of Finance public consultation paper in June which highlights “the confusing nature of the current treatment of financial products”.

Davy echoes concerns raised in that paper that “differing tax regimes may cause investors to choose one type of investment over another”.

“Even for more sophisticated investors, the regime presents an avenue for tax arbitrage, favouring investment vehicles with suboptimal structures over regulated fund options,” the submission warns.

The document highlights that while tax law allows individuals to offset losses from one asset against gains from another, there is no equivalent provision for funds.

“Therefore, if an investor has invested in two separate funds and disposes one at a gain and one at a loss, there is no loss relief available for the investor,” Davy points out.

It adds that this creates an uneven playing field for funds that could help investors to diversify their holdings and cut their risks.

Davy’s view is that it is critical that identical rates of tax apply to life policies, and Irish-domiciled funds and equivalent funds in the EU, European Economic Area and Organisation for Economic Co-operation and Development.

The brokers maintain that this identical rate should apply irrespective of how tax is collected on these investments, that is, either taxation at source or self-assessment.

“Differences in tax policies for investment products are influencing investors to choose solutions are not necessarily the best from an investment perspective,” says the submission.