Advice on tax efficient long term investing - Irish life assurance fund versus offshore US-based funds

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mikadelic

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Hi, first time posting but frequent reader of this and other Irish forums on investing.
I am looking for advice (professional/non-professional) on how to best invest a seven figure sum for the mid- to long-term for an Irish resident.
It will be an investment for children that can stay invested for 10-15+ years, so the approach would be to place the sum into a trust, and then invest it (to avoid any forced divestment on death, for example). The closer the investment is to passive and hands-off the better, and while I am able to educate myself to some degree, I want to essentially set and forget the investment for as long as possible as none of the beneficiaries will need to touch the investment in the short-term.

From the homework done to date, we have advanced talks with several of the Irish life assurance providers, and given how much is being invested, we have some very attractive options on the table in terms of total management fees for some of their standard funds. They are bringing this actively managed fund cost down to almost the same cost of a passive investment, but with all the comforts of a fully managed investment.
I am also aware to some degree of the impact of PRIIPS and withdrawal of access to ETFs affected by this a few years ago. I do like the idea of mutual funds and ETFs for the investment, such as a VTWAX or Vanguard World ETF.

However, I am finding it very difficult to accept the exposure to Irish exit tax and the deemed disposal tax, and I would like some help understanding the possibility and complexity of investing outside of Ireland to avoid the deemed disposal tax and to be subject to CGT instead. Considering a seven figure sum for investment:
1. Is it currently feasible to invest as an Irish resident and avoid deemed disposal tax and exit tax, and instead be subject to CGT/Income tax when gains are realized? Can anyone please give some examples of this?
2. Are there well established brokers/providers in Ireland that can be used to invest in a passive index fund or ETF such as a Vanguard VTWAX or Vanguard World ETF. Or is it possible and common to establish these investments directly with US brokers?
3. Are there any risks to consider with how Revenue will view this type of investing, or are the Revenue "OK" with these type of investments as long as a person is willing to put in the additional risk and effort of investing abroad?

Any insights would be great.
Thanks.
 
Hi,

We have consulted on several structures for families recently which establish exactly what you are seeking to achieve namely taking a long term, low cost passive investment approach using both non EU investment funds and trusts for minors.

This will give you income tax and capital gains tax treatment rather than exit tax. However it is important to note that a minor’s dividends are taxed back on the settlor while their holding is in trust. They do however obtain the lower capital gains tax rate.

These structures need both a lawyer to draft the legal structure and an investment manager to access the non-EU funds and so don’t work well for smaller investments due to the fixed costs but work perfectly for larger investments.

Happy to have a no obligation chat with you.

Marc Westlake CFP®, TEP, APFS, EFP ,QFA
CHARTERED, CERTIFIED & EUROPEAN FINANCIAL PLANNER™ professional
AND REGISTERED TRUST & ESTATE PRACTITIONER
Managing Director

Www.globalwealth.ie
Chartered Financial Planners
 
Thanks Marc,
Agreed that professional legal and financial advice will be part of a final decision. There are no minors in the trust, but thanks for the info.
Are the investment managers in these type of situations Irish based or can one go closer to the source if investing in non-EU funds?
I would appreciate your opinion or other insights on my three points. Thanks for the contact info also, I will see what the community can share and then reach out to professionals afterwards.
 
The PRIIPS regulation means that advisors have to provide a KIID document to investors before an investment is made. Vanguard etc have provided this information for their European based funds but won't do it for their US based ones. It doesn't mean they are not still available though. They're just not available to the "retail client" ie you and me. An institution can buy them though ie a fund manager. The US based ETFs are subject to CGT. With the size of the pot you have, you can also have a bespoke investment strategy constructed for you with individual shares as well as ETFs. You would be able to offset any losses against other gains, pay income tax on dividends and CGT on gains when the shares are sold.

Another issue on using an insurance company is there is a 1% government levy on the contribution, so the government is deducting at least €10k from the contribution. I am sure the life companies you have spoken to are going to cover this for you though.

There is no real need to invest abroad as the facilities are available in Ireland to do what you want to do at that level of investment.


Steven
www.bluewaterfp.ie
 
Thanks Steven, clear response, very much appreciated. Aware of the levy and yes it is covered while keeping a very attractive annual commission.
I have seen some threads and websites on selecting and using Irish brokers/managers, and I understand all are regulated by the central bank, but would you mind clarifying what additional security/gaurantees one can get from using an Irish based manager. Is there publicly available information on how much Irish brokers/managers are actually managing?
There may even be a checklist here on AAM for what to ask of a fund manager but I just havent come across it yet.
As you can imagine, I would like to inform myself as much as possible before engaging with individual advisors/managers.
 
There's no list on how much an advisor/ broker manages. An advisor doesn't hold the money anyway, you have to be an authorised product producers. Not sure there's a list on the amount of assets they hold but they are certainly on their individual websites.




Steven
www.bluewaterfp.ie
 
@mikadelic

Unfortunately I've nothing constructive to add on an alternative structure to minimise the taxation exposure and I don't want to take your post off topic but, given the current penal rate of exit tax at 41% , what would you deem to be a fair taxation rate on Exit Tax?

CGT has an annual exemption, a facility to offset losses against gains, it's self-assessed so there's a higher risk of tax evasion, and the current rate is 33%.

I'm thinking 23% would be a fair rate. Hypothetically, what level would make you reconsider looking at complex alternatives?

If you invested in 2006, it was 23%. On the 8th Anniversary (deemed disposal date) it was 41%. That was very hard for investors to stomach and it put them off the products. There was €4.63bn invested in these products in 2006, in 2018 it was €1.35bn. Even allowing for the exotic tracker bonds and geared property yokes of that time, IMHO it's the tax that's putting folk off unit-linked funds.
 
Hi GSheehy, thanks for adding some insights to my post, as long as it is active and on topic, all comments are welcome.
First a question, do you have a specific source(s) for your data points from 06, etc? It would be very useful for me to build a picture over time of the Irish market.
To your query, what is most frustrating is the deemed disposal every 8 years, combine it with an exit tax rate of 41%, and it completely chokes the compounding benefits of long term investing for individual irish investors. In my opinion, it is disheartening given the domicile of so many funds here and a very unintelligent way to collect tax.

I can't pick a specific tax rate, but if deemed disposal was eliminated, and exit tax was brought in line with CGT, it would be a decent kickstart to promote irish people to invest more.

Can you elaborate more on:
- the products that were being invested in at the sums mentioned?
- the CGT allowance? (Is it the €1270/yr)
- what do you view as complex alternatives? I believe what I'm looking for is not complex (passive investing funds/trackers not exposed to deemed disposal), I just want to find out how to access it efficiently.

Any insights appreciated. Thanks
 
Hi again,

You are going to find this process extremely frustrating.

I totally agree with you that it makes no sense at all that international fund managers should be encouraged to domicile their funds in Ireland and yet Irish residents are subject to such a crazy situation as exit tax on these funds.

Having spent over 10 years on this subject I can assure you that it is possible to achieve what you are seeking to do.

Non-EU ETFs do not provide KIDs and therefore are currently unavailable to Retail
Investors due to the implementation of PRIIPS regulations. However, Professional
Investors are not subject to this restriction and may establish portfolios of non-EU ETFs in behalf of retail investors.

Non- EU ETFs are subject to income tax and CGT as confirmed in Revenue e-brief which was partly on the foot of an article I contributed to in the Sunday Business Post.

There are some disadvantages to certain non-EU ETFs notably in the USA where non-resident foreign aliens are subject to US estate taxes on investments in excess of $60,000 again something i highlighted on AAM and in the Sunday Times some time ago.

I can provide a solution for you and in response to one of your questions our investment partners manage in excess of $2 billion in Ireland, the UK and South Africa.

I have written a comprehensive tax guide which sets out detailed answers to all your questions and some you haven’t thought of such as dividend withholding taxes.

We would be glad to assist
 
Hi Mikadelic,

In general when looking at CGT based investment options it tends to narrow down to 3 main options;

1) a portfolio of directly held equities - which will require an element of maintenance and will not meet your "hands off" objective
2) UK Investment trusts which are actively manged but in many ways are comparable to Life Company funds in that they tend to be well diversified holdings and a wide range of investment strategies to select from albeit with CGT treatment
3) A discretionary fund manager who can access ETFS where CGT applies

Just a thought, but generally CGT has a clear advantage for clients where a) there are unutilised losses which can be offset against gains or b) clients with low income levels so any dividends may be taxed at the lower rate.
If neither apply in your case then the benefits of CGT may be less compelling. If the gains in the potential portfolio comprised 50% Capital Gains and 50% income via dividends then for a top rate taxpayer then the effective tax rate can be almost equivalent to Exit tax. Self reporting of tax with CGT adds another level of costs but for a large portfolio then this may be less of an issue
There is the CGT offset against CAT for generational planning but if the assets are in Trust then this falls away.

Is the 8 year deemed encashment the major negative you see on Exit tax options or is there something else which is driving your clear preference for CGT?

I suggest your analysis when concluded will need to calculate the tax benefits of CGT versus Exit tax but also the Cost/charges element of CGT versus Exit tax where passive investments albeit taxed under Exit tax will have lower annual charges than CGT options. Dont forget your tax self assesment charges with CGT also.
I commend your approach to this challenge by seeking out various options and opinions. It really is an area which is unecessarily complicated for clients and practitioners alike.

All the best Vincent
 
Thanks everyone for all the feedback, difficult to digest it all, so thanks for keeping comments as clear and on topic as possible. I hope my replies are furthering the conversation.

@Marc
Thanks for the info, great to get a professional's opinion. I am aware of the dividend witholding tax, just didn't want to focus on it. But I was not aware of the US estate tax on certain funds. Have you an example of these funds? I mentioned I wanted to access passive world equity index/ETF funds such as those by Vanguard, are some of these subject to this?
Is your tax guide and SBP articles publicly available?

@North Star
Yes, it is the deemed disposal that is my major issue as it is a 15+ year plan.
Thanks, was not aware some UK Investment Trusts can be used to fall outside of deemed disposal.
I couldnt find the info easily on some accumulating funds, but I assume over a 15-20 year horizon, there is no way dividends could make up 50% of the gain?


----------------------------------------------

I am seeing lots of mention of bespoke plans if I do NOT choose the Life Insurance option, but I am unclear if this is just because:
a) it is par for the course where professional advisors are more used for bespoke "active" investment plans
b) or, it is actually the most efficient way to set it up from a tax and management costs perspective


From what I am reading, my two options right now are:
1. Irish life insurance provider, high yield equities fund or similar, subject to Exit tax and deemed disposal
2. Irish financial advisor, non-EU passive fund such as VTWAX or similar index fund, subject to CGT/income tax and no deemed disposal

Both approaches are going to be setup in a trust, will be planned for a 15+ year horizon, and will require financial/legal/tax advice.

From all the comments above,
- it is sounding like the professional fees of option 2 might actually be as high as option one. Is this correct even if I want a passive product? Can I expect to pay once-off to set it up a trust/passive investment product, or will I be expecting annual commissions from advisors even if it is passively invested for the long term?
- am I correct that comparing both options in terms of tax effects, the deemed disposal on option 1 should outweigh most other tax effects in a 15+ year investment?

Thanks to all again for the input, it is very helpful.
 
joom.ag

Tax Guide 2019 Global Wealth Tax Guide 2019

This guide sets out the issues Irish Resident and Domiciled investors should consider in order to ensure that their investment portfolio is the most suitable for their particular requirements. We summarise Personal and Capital Taxes in Ireland along with the taxation of different fund...
joom.ag joom.ag
 
It’s not really possible to directly compare the costs of the Irish unit linked option with a non EU ETF portfolio as they are subject to different disclosure regimes.

I have conducted a detailed analysis which again was covered by the Sunday business post

www.businesspost.ie

Comment: Cut through the smoke and reflect on mirror funds

Hidden charges cloud the cost of investing in Ireland
www.businesspost.ie www.businesspost.ie

It’s possible to make an educated guess at the real cost of a unit linked fund in Ireland by comparing it to either a UCITS version of the same fund or by measuring the tracking error against an index.

There was a poster on here a few years ago ,@mercman I think, who invested a seven figure sum with a life co and was promised the moon on a stick in terms of increased allocations and bonuses etc and then spent the next several years complaining he had been misled.
 
@mikadelic

Complex alternatives was the wrong way to put it. What I was getting at was, that it should be a lot simpler to do what you're trying to do, leaving aside the trust/legal structure.

The historical rates of LAET are quoted in this document (page 4)

The products were/are Single Premium Life Insurance contracts and the historical data is based on the Insurance Ireland 'Fact File' documents published by them.

Yes, on the €1,270.

The LAET regime *will* change but we've no idea what it will look like in 8 years time.
 
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Hi again Mikadelic,


I think you are actually looking at 3 main options;

1) The Life company route - with Exit Tax and deemed disposals after 8 years
2) A bespoke passive investment portfolio implemented by an adviser using a fund platform to access passive options like Vanguard - again with Exit Tax and deemed disposals after 8 years
3) A CGT portfolio - withg the 3 options I mentioned in my earlier post

Re charges, at least now with Mifid we have the benefit of much better disclosure on all Life Company costs including those over and above the annual management charge. You just want to be certain that you are comparing apples with apples when it comes to the costs.

re ongoing adviser costs irrespective of what of the 3 options above option you take, then this should be up to you. I may consider not having on-going support and advice for a significant portfolio a false economy, buy ultimately that is your decision. You should be given options to proceed with and without on-going charges and advice.
It is always good practice to get several proposals to allow you to do your cost/benefit analysis and give you better price transparency.

All the best Vincent
 
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