The details
You can contribute up to €12,000 to the IIA a year. The first €50,000 in the account will be tax free. Any amount over €50,000 is taxed at 1% each year. The 1% tax is on both the capital and the growth of your fund once it is over €50,000, not just on the growth like with all other investments. The tax will be deducted by the provider and to the Revenue on your behalf. There are no minimum contributions and no exit penalties. You must be over 18 to have an account and it is one account per person. The Revenue will check this through your PPS number.
Is it better than what we have already?
Also in his speech, Harris announced that the tax on existing investments will be reduced to 35% from 1 January 2027. Deemed disposal is still under review (the Department of Finance is still figuring out how to replace the lost income).
I ran the figures on an annual investment of €12,000 growing by 6% per annum under the two different plans. The figures below are net of tax and include deemed disposal deductions from the fund in years 8 and 16.
6% Annualised Return |
| Existing Plan | IIA | |
| 10 Years | 150,138 | 163,161 |
| 20 Years | 373,595 | 428,476 |
Where things become questionable is if growth is low. I ran the same comparison but reduced the growth to 3% per annum. As you can see the numbers are a lot closer.
3% Annualised Return |
| Existing Plan | IIA | |
| 10 Years | 133,908 | 138,394 |
| 20 Years | 296,935 | 307,475 |
Who are the IIA plans suitable for?
The purpose of the introduction of the IIA plan is get money off deposit and get people investing. I do not think that the tax structure of this plan is suitable for those who want “low risk” i.e. low growth investments as the tax on capital will work against them. Those who are happy to invest in equities i.e. high growth, it is a suitable structure. However, we do know that we won’t get 6% growth every year. Some years there will be a loss and you will still be paying tax despite losing money. But in the long term, it is suitable to investors willing to invest primarily in equities.
The IIA plan will be a part of a family’s overall investment portfolio with both spouse’s contributing to the IIA and any amounts over €24,000 going into the old plans, so families will have three plans instead of one.
It also looks very attractive for parents who are using the annual gift exemption for adult children. There is no indication that the bare trust structure can be used for the IIA but it can certainly be used once your child is 18. I am writing this before the Finance Bill has been published so I do not know if parents can pay directly into the account on their adult child’s behalf. If not, it will be a case of gifting your child €6,000 and the money coming from their own account. With the gift exemption capped at €6,000 a year, it will be seven years before tax is paid if there is 6% annualised growth, so it will be attractive in these cases.
Overall impression is that it is alright. The IIA is certainly not designed to make the investment community excited. We are given something that is slightly better than what we currently have. It will be used and it can be touted as a success. It looks to me that simplifying the tax system for the Revenue was the priority. Regular tax income every year and they just get a bank transfer from the provider without having to worry about deemed disposal and exit tax payments.
- By Steven Barrett of Bluewater Financial Planning.
