ETF's, Direct Shareholdings and the new 8-Year Rule

Hi,

I've been looking at ETF's recently and have been tempted by their charges for tracking the Eurostoxx 50 which are as low as 0.15% compared to Quinn Direct's 1% - you do have stockbroker charges with ETF's but they're as low as €10 with http://www.keytrade.com for a purchase of any size.

However, I've been reading about the new 8-year rule where every 8th anniversary of buying into a fund, you are now liable to pay CGT on any gains made in the fund, whether you have realised them or not. I assume that, as ETF's are taxed similarly to funds (23% exit tax as opposed to 20% capital gains tax), that this rule will also apply to ETF's. Can someone confirm this?

If this is the case, if purchasing ETF's for the long term, after year 8 you would have to submit an annual return detail the profit made in year 1 and pay tax on it at 23%, after year 9 you would have to submit an annual return detail the profit made in year 2 and pay tax on it at 23%, and so on. Have I got this right?

If this is the case, it may be advantageous to hold shares directly as opposed to ETF's.

I've done a spreadsheet which assumes that you have €3010 per quarter to invest (€10 for the stockbroker charges and €3000 in the ETF/Shares). It assumes that after year 8, your exit-tax that your forced to pay (whether you sell or not), is taken out of the final €3000 investment of each year. Dividends are paid in the last quarter of each year and the proceeds (after paying tax) are reinvested. I've also used a competitively priced Lyxor ETF which charges 0.25% annual management charge and assumed a dividend yield of 2.14% (as per the Euro Stoxx 50). I've used a 20-year timeframe for this and assumed that you sell everything after the 20 years.

The difference in the two methods after twenty years (caused by loss of growth on tax paid earlier, annual management charges and the additional 3% charged on the fund) is as follows:

40% Tax Payer - 7% Fund Growth

Fund Value ETF: €519,006
Fund Value Shares: €545,080
Difference: €26,074

40% Tax Payer - 9% Fund Growth

Fund Value ETF: €645,784
Fund Value Shares: €684,944
Difference: €39,160


20% Tax Payer - 7% Fund Growth

Fund Value ETF: €548,815
Fund Value Shares: €576,948
Difference: €28,133

20% Tax Payer - 9% Fund Growth

Fund Value ETF: €684,629
Fund Value Shares: €726,803
Difference: €42,174

Therefore, with the new 8-year rule, there is a distinct advantage in investing in shares over the long term. In addition to the above, there are various other advantages such as the ability to use your capital gains tax allowance each year and the ability to choose what you think are the 10/20 or whatever number of stocks are best out of, for example, the Eurostoxx 50 and leave the rest out of your portfolio. Also, it avoids the need for an annual tax return after year 8 of investing.

P.M. Me if you'd like to view the spreadsheet.

Are you sure that after 8 years you must pay CGT every year? I presumed that you have to pay CGT every 8 years. That would make a big difference to your spreadsheets.

I'm not 100% certain but I'm sure that if you ask the revenue they will make it clear as mud as they probably won't have a clue either

However, I think it would be reasonable to assume that tax will have to be paid on year 1's purchases after year 8, on year 2's purchases after year 9 and so on. This is the assumption I'm making until I'm told otherwise.

Maybe im reading your table wrong but are you factoring in your eventual tax on the sale of the direct shares. Yes they will be worth more but you will have a liability.

An EFT is a share, not like a fund. I didnt think you had to sell your shares every 8 years ? is this true ? whats going on ?

Revenue don't seem to have an awful lot of info on the 8 year deemed disposal rules on their website (e.g. do they apply to indirect investments such as unit linked funds only or also ETFs or even direct investments such as shares...)? Anybody know the details?

Just looked into Eagle Stars Matrix funds. Whatever monies are paid out of your investment you pay tax on any gains made. Tax on gains also payable every 8 years. Eagle star deduct it and pay it over to Rev. Comm. leaving you with no further tax liability. Rate of tax is 23% + 3%. However if you choose to incl. life cover on your plan, you dont pay tax. Eagle Stars info
very clear.

It strikes me as unlikely that this 8 year rule applies to ETFS, which trade just like stocks .
If it is true, then one should sell after year 7, pay the CGT, and then re-invest in a different ETF, or in the same one after an interval.
Are there any posters reading this who are accountants, or who work for the Revenue? Or the Stock Exchange?
If so, let's have some clarification!

ETFs may trade like stocks but they are in fact set-up as investment funds and so do come within the scope of the 8 year rule.

Thank you jpd. Hopefully, that point is now settled!

jpd said:

ETFs may trade like stocks but they are in fact set-up as investment funds and so do come within the scope of the 8 year rule.

Click to expand...

Is there a link in revenue.ie which specifically mentions this ? This is extremely important information for anyone who owns or is considering purchasing ETF's
Why would revenue pick on 'ETF shares' ? and not pick on investment trusts and shares in Berkshire Hathaway etc

I can't get any reference to the 8 year rule in my research, about ETFS. However, it sounds like jpd is confident about it. My own accountant didn't know the answer.

It still doesnt seem right that I should be forced to dispose of an asset in this context. And it makes ETF's a lot more uneconomic. (if true)

ETF's are normally structured as investment companies and if incorporated in the EU or US, fall under the new regime as instituted by the Finance Act of 2001 which brought them under the same umbrella as the funds normally sold in Ireland as insurance funds under the gross roll-up scheme.

The taxation is described here: [broken link removed]

I agree that the situation isn't 100% clear, but as I understand it the 8 year rule applies to all investments in funds and insurance-type policies both Irish and other non-offshore policies.