Buying shares as a regular savings plan

[Fella]

ok I like these Investment trusts traded as shares and you pay 33% tax when you sell , it's all good , but are they only in GBP ? Thats a bummer buying now while the euro is so low compared to the pound.

 

[Gordon Gekko]

Guys

US domiciled ETFs are taxed just like shares. No exit tax, no 8 year event, loss relief available and CGT/income tax.

 

[Sarenco]

Well don't forget that with loss relief from CGT you can carry losses forward but not backwards so it wouldn't help in the scenario that you've outlined.

If you have losses available (for example on bank shares, investment properties, etc.) then that makes the case for investing directly in equities/ITs as against funds even more compelling but again I would emphasise that you should never let the tax tail wag the investment dog - tax loss harvesting is really a minor benefit at best over the long term.

While I think the current tax regime for index funds is pretty awful, I wouldn't immediately jump to the conclusion that you should necessarily bail out and go 100% to cash - it very much depends on your overall personal circumstances. Don't forget that you will have to pay DIRT (and possibly PRSI) on your deposit interest and at least with accumulating funds you get 8 years of roll-up before the deemed disposal.

Are you sure you are maximising your pension contributions (including AVCs if relevant)? People often seem to forget that you can invest in equities within a retirement account...

As regards my personal situation - trust me, you wouldn't want to repeat my mistakes!

 

[Sarenco]

Guys

US domiciled ETFs are taxed just like shares. No exit tax, no 8 year event, loss relief available and CGT/income tax.

That is certainly true in terms of the Irish tax position.

I don't want to go over old ground but hopefully we can agree that US domiciled ETFs are not designed with non-US investors in mind and come with US specific tax issues/complications.

 

[Sarenco]

ok I like these Investment trusts traded as shares and you pay 33% tax when you sell , it's all good , but are they only in GBP ? Thats a bummer buying now while the euro is so low compared to the pound.

You will certainly have currency conversion costs (there are plenty of posts on here as to this can be minimised), stamp duty (0.5%) and broker commissions on acquiring shares in ITs. However, your currency exposure is to whatever currency the underlying securities held by the IT are denominated - not necessarily GBP.

 

[landlord]

Fella.....everything that your discussing now has been driving me mad for a few weeks now....
I have a fairly large lump sum to invest and its a choice between....

1. Investment Trusts. (CGT at 33% with loss relief), (dividends as income tax 20/40% plus PRSI and USC). Great diversity of assets available, Actively managed---good/bad???.
My concerns are do the fund managers abilitys justify the higher TERs
I just googled the TER of City of London Trust and found it was actually lower than I thought....0.4% and foreign and colonial 0.5% and both trusts appear to have outperformed the benchmarks over the last few years. (Or is that just the sales talk on the prospectus?)
My other concern is as Fella says buying anything in Sterling at the moment seems poor value now and a huge risk long term, considering over 10-20 years I would be fairly sure the Euro would strengthen, eating into your potential gains, when you convert back to Euro. Currency costs to consider too.
Are all investment trusts distributing? Anything accumulating in my eyes is one less tax headache!!!!

2. US Domiciled ETFs. Tax treatment is the same as she has an investment trusts (CGT at 33% with loss relief), (dividends as income tax 20/40% plus PRSI and USC). Great diversity of assets available. Only distributing ETFs no accumulating ETFs (tax headache!!! ). Conversion costs and currency risk when purchasing them (dollars), again due to the possibility of a strengthening of the Euro over time.

3. EU/IRISH Domiciled ETFs. Complicated tax structure 41% tax on gains and distributions, 8 years deemed disposal. Although there are accumulating ETFs (tax heaven!) Also some of these are denominated in Euros, for example Vanguard have several on the Amsterdam and Paris stock exchange , so no currency conversion costs, but I guess the currency risk of a strengthening Euro still exists.

My wish list....
Simple tax structure preferably (taxed as shares)
Accumulating if possible
Low cost
Diverse portfolio
No currency conversion costs
Reduced currency risk
And Heidi Klum to be my personal asset manager!!!

 

[Sarenco]

Just to make the point again that your currency exposure is to the currency in which the assets of the fund/IT are denominated - not to the currency in which the shares of the fund/IT are denominated.

 

[Sarenco]

Fella.....everything that your discussing now has been driving me mad for a few weeks now....
I have a fairly large lump sum to invest and its a choice between....

...if you want to invest in collective equity investments.

Bear in mind that paying down debt, for example, is always a risk-free, commission-free and tax-free option...

 

[landlord]

Just to make the point again that your currency exposure is to the currency in which the assets of the fund/IT are denominated - not to the currency in which the shares of the fund/IT are denominated.

Sarenco you have mentioned this a few times now and I am not certain I and probably others fully understand it....
This is how I see currency risk....
Is this correct?

Say you invest in a U.S. WORLD FUND.....Double currency risk...
1. Euros are converted to dollars to purchase the fund. You invest for 10 years and during that period the value of the Euro against the dollar strengthens. When you sell your portfolio after 10 years your profits would've been dampened by the increased value of the Euro.
2. If you buy this ETF, you will be exposed to currency risk within the ETF. For example, the base currency of this world ETF fund is USD, but this world ETF will invest in many different countries stocks and therefore in many different currencies. If the fund invests entirely in non U.S. stocks for example and during the investment period the dollar strengthens, then the value of the fund in dollars would be less.

 

[Sarenco]

Say you exchange your euro for dollars at a ratio of 1:1 and invest in a fund whose shares are denominated in dollars and invests exclusively in US stocks. After 10 years, say the NAV of the fund, expressed in dollars, has gone nowhere but you could now convert dollars for euro at a ratio of 2:1. So in dollar terms you've gone nowhere but in euro terms you have doubled your money.

Now, let's say the same fund (pool of assets) issues euro denominated shares. While the fund's NAV has still gone nowhere in dollar terms, you still double your money in euro terms simply because the relative value of the dollar in which the fund's assets were denominated has doubled.

Does that help?

 

[landlord]

...if you want to invest in collective equity investments.

Bear in mind that paying down debt, for example, is always a risk-free, commission-free and tax-free option...

I guess you are referring to paying down my RIP mortgage debt. At ECB+0.75%, even a descent bank savings account after DIRT would earn more than that......but point taken!!!!

 

[Fella]

I'm going to do some research on these Investment trusts as in which ones to buy and sell off all of my ETF's now i'm done with ETF's they are a non runner for me. My Saxo account is in Euro I just had a look at the fees they charge -

Currency conversions of trading costs as well as profits and losses from trading activities are done using the mid-spread FX Spot rate when you close the position, plus/minus 0.5%

That doesn't seem to bad , thanks for your replies Sarenco and landlord , i'll post up what I invest in if thats allowed, maybe you will do the same Landlord, there are lots of sites that list trusts and comparisons of them.

My last issue was that Euro is relatively weak now compared to the past but I suppose I shouldn't speculate on currency movements it could move for or against me in future. I think though for my own peace of mind I will use a sterling cost averaging in this case and buy into these trusts with an initial lump of say 25% of what i had invested in ETF's and buy more every few months , over the next 10/20 years I will be buying at weak and strong points on currency scale.


Just in relation to Sarenco's point on " but you should never let the tax tail wag your investment dog!" surely at a certain tax level you have to take serious considerations to the tax implications, with no loss relief 41% exit tax the only way i could ever see irish domicilied ETf's been an option is if you just put one lump sum in to one ETF and never touched it again as regular topping up is too risky imo.

 

[landlord]

Say you exchange your euro for dollars at a ratio of 1:1 and invest in a fund whose shares are denominated in dollars and invests exclusively in US stocks. After 10 years, say the NAV of the fund, expressed in dollars, has gone nowhere but you could now convert dollars for euro at a ratio of 2:1. So in dollar terms you've gone nowhere but in euro terms you have doubled your money.

Now, let's say the same fund (pool of assets) issues euro denominated shares. While the fund's NAV has still gone nowhere in dollar terms, you still double your money in euro terms simply because the relative value of the dollar in which the fund's assets were denominated has doubled.

Does that help?

VUSA Vanguard S&P 500 ETF
is available on the New York(dollars), London(GBP) and Amsterdam or Paris(EURO) stock exchanges.
The underlying assets are US stocks IN DOLLARS. So you are saying that regardless of which exchange you buy it on and in which currency, your risk is the strength of the dollar when you come to sell. I get this!!, but I can't see how my example above is not correct?

 

[landlord]

I am now swayed towards buying a few EU/IRISH Domiciled accumulating ETFs......
Assuming for example a 16 year investment, with hopefully, over that V long period no capital loss (the lack of loss relief then being no issue), there would be very little work required in managing the tax issues.(just the deemed disposal at 8 and 16 years and no dividends to account for).

I don't suppose there are any accumulating investment trusts ?
Sarenco.....you mentioned a couple of times that investment trusts (which are UK based in GBP) are subject to 0.5% stamp duty (like UK shares). I have written down in my notes that there is no stamp duty on investment trusts. I just contacted TD Waterhouse and the response I got was "that's correct there's only stamp duty on the FTSE 350 stock". I have just sent an email back to confirm this (thinking Sarenco is never wrong !!) and asked them to check specifically the London bankers trust (BNKR).

 

[Fella]

I'm trying to find on revenue where it says investment trusts are treated like shares for CGT and loss relief can't find it anywhere , i know most here say they are treated like shares but would like to find it in writing before diving in again and realising that Revenue haven't clear guidance on this and they will probably realease a note like they did for ETF''s and say they are gross roll-up , revenue site is a joke trying to navigate it.

 

[landlord]

I'm trying to find on revenue where it says investment trusts are treated like shares for CGT and loss relief can't find it anywhere , i know most here say they are treated like shares but would like to find it in writing before diving in again and realising that Revenue haven't clear guidance on this and they will probably realease a note like they did for ETF''s and say they are gross roll-up , revenue site is a joke trying to navigate it.

Read this from Rory Gillen ...
Investment trusts: are not dealt with in the Revenues guidelines. Our interpretation is that because there is no link between the value of the fund's assets and its share price that they are more akin to shares/securities. In that case, dividends to be taxed at your marginal rate (plus USC and PRSI on gross dividend), gains at the CGT rate and loss relief should be available.

 

[landlord]

Sarenco, Fella,.....information back from TD WATERHOUSE just now.....

I've just checked on this specific stock, (BNKR-UK bankers investment trust) and amongst investment trusts, it appears to be somewhat of an anomaly. Basically, if the market cap is below 170 million, then you aren't charged stamp duty. However, any assets with a market cap above that figure, are in fact subject to stamp duty, I'm afraid. BNKR's market cap is at 738.71 million, and as such, stamp duty would be charged.
It's an HM Revenue and Customs regulation as the stock trades on LSE, and it's charged at 0.5%.
Our system picks it up automatically and we take it into account, when you place the trade i.e. it's factored into the consideration.

..........as if things weren't already complicated!!!

 

[Sarenco]

I guess you are referring to paying down my RIP mortgage debt. At ECB+0.75%, even a descent bank savings account after DIRT would earn more than that......but point taken!!!!

Hi landlord

I was really just trying to make the broader point that paying down debt is often the optimum use for disposable income that is not required for short or medium term needs, rather than commenting on your own circumstances.

I think you would struggle to find a sight deposit today that yields more than around 0.75% after DIRT, PRSI and fees. Even if this net rate exceeds the effective interest rate on your RIP mortgage debt (allowing for the fact that 75% of the mortgage interest is deductible for income tax purposes), you still have to bear in mind that you are taking a credit risk with the deposit - the bank and any deposit guarantee scheme might go bust. You might view this risk as minimal but it's still a risk that you would want to get paid for taking. The extent to which you would want to be rewarded for taking this additional risk is obviously a matter of judgment.

 

[Sarenco]

VUSA Vanguard S&P 500 ETF
is available on the New York(dollars), London(GBP) and Amsterdam or Paris(EURO) stock exchanges.
The underlying assets are US stocks IN DOLLARS. So you are saying that regardless of which exchange you buy it on and in which currency, your risk is the strength of the dollar when you come to sell. I get this!!, but I can't see how my example above is not correct?

That's it exactly - your currency exposure in that example is to USD. This may well have been what you were saying above but I found the second part of your example somewhat confusing so I thought I'd restate the example in slightly different terms.

 

[Sarenco]

Sarenco, Fella,.....information back from TD WATERHOUSE just now.....

I've just checked on this specific stock, (BNKR-UK bankers investment trust) and amongst investment trusts, it appears to be somewhat of an anomaly. Basically, if the market cap is below 170 million, then you aren't charged stamp duty. However, any assets with a market cap above that figure, are in fact subject to stamp duty, I'm afraid. BNKR's market cap is at 738.71 million, and as such, stamp duty would be charged.
It's an HM Revenue and Customs regulation as the stock trades on LSE, and it's charged at 0.5%.
Our system picks it up automatically and we take it into account, when you place the trade i.e. it's factored into the consideration.

..........as if things weren't already complicated!!!

For all practical purposes, stamp duty (technically stamp duty reserve tax) is charged at a rate 0.5% on the acquisition on shares in an IT (there are a few rare exceptions to this general rule but I don't want to over complicate things). You don't have to write a cheque for this amount - it's deducted automatically like an additional trading spread.