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Sunday 21 September 2014

Six smart ways to minimise your tax exposure

Published 06/04/2014 | 02:30

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* Invest directly in non-dividend paying shares. You'll pay 33 per cent capital gains tax (CGT) on any profit you make when you sell those shares. Choose your shares wisely however so that you make a profit – and not a loss. Invest in a range of shares, so you don't lose all your money should one perform badly.

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* Consider a medium-risk structured investment. "Merrion Capital's Kick out Bonds and Partial Protected Eurostoxx Bond are examples of structured investments which are not fully capital protected," says Paul Earley of Earley Consulting. "As investors' capital is at risk, and they are not wrapped in a life policy, any gains are subject to CGT at 33 per cent." Only invest in these products if you are comfortable with the risk that comes with them. When an investment doesn't come with a full capital guarantee, you can lose some or all of the money you invest.

* Invest more money in your pension. "Both income and capital gains within a pension fund are completely tax free, and the compounding effect of tax-free growth over time is very powerful," said Earley. Furthermore, if you are a higher-rate taxpayer, you also get 41 per cent tax relief on any money paid into a pension – up to certain limits.

* Invest in property. If you buy an investment property before the end of this year, you won't have to pay CGT on any profit you make on the sale of that property – as long as you hold on to it for seven years. You will usually have to pay tax on any rental income you receive however – but if you make a big tax-free profit after seven years, that profit could dwarf the tax you paid on rental income. Choose your property and location well however – if the market value of your property doesn't increase over time, you won't have any CGT to pay because you won't have made a profit. So you'll get no benefit from the CGT exemption.

* If you are a cautious saver, but have not yet put your money into any of the State savings schemes, doing so could be your best way to escape the tax on savings interest. "In terms of tax-efficient investments, the various State savings schemes are currently our top pick," said Vincent Digby of Impartial. The annual return on the three-year savings bond is 1.32 per cent but as this interest is earned tax-free, the rate is higher than it seems. "If paying DIRT and 4 per cent PRSI, a bank deposit for the same period would need to make an annual return of 2.37 per cent to be equivalent," said Digby. Similarly, the four-year National Solidarity Bond pays 1.47 per cent interest a year – but as this return is tax-free, a bank would need to pay 2.62 per cent interest a year to match it, according to Digby. "Remember, you need to hold these products to maturity or you do not receive the full rate of return," he added.

* If you're feeling adventurous, you might be tempted to put some money into spread betting, where you essentially bet on the movement of shares. You don't pay any CGT on winnings from spread betting. Neither do you pay any stamp duty or betting duty, according to a spokeswoman for the Revenue Commissioners. Spread betting is very risky however – and by no means should you ever consider putting too much money into it.

Only bet money that you can afford to lose.

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