In January 2028, you calculate deemed disposal exit tax on the first €500 purchase. In February 2028, you calculate deemed disposal exit tax on the second €500 purchase. And so on.
ETF 8 year deemed disposal strategy
- Thread starter Minnow2
- Start date
It was originally standard rate of income tax plus 3%. Then they started increasing the 3%, then they removed the link to income tax. It moved in line with DIRT, untill that was reduced (a cynical move when no interest was paid, but the government could say they were looking after the interests of pensioners, despite the fact that they have large amounts of life savings subject to exit tax).
The linked document only applies to funds that deduct the tax and remit to Revenue. Choosing the value at June or December isn't an option.You can use either the unit price on the actual anniversary (1st Jan 2028, 1st Feb 2028, 1st Mar 2028...)
Or to simplify you can choose to use the unit price on the previous mid- or end-year (31st Dec 2027 is the easiest).
Part 27 - Sections 731-747F
www.revenue.ie
4.3.1 What gain is taxed?
Where the chargeable event is the ending of an 8-year period, the value of the units at the time less their cost of acquisition (if the investment undertaking so elects, the value of the units at 30 June or 31 December prior to the date of the chargeable event).
The Deemed Disposal 41% rate is in existence since 2014 - we've had two general elections since then.
Hands up all those who have contacted the politician they vote for, raised the rate with those who canvassed them at their front door, talked to the TD for their area, wrote to the DoF, Revenue or Minister for Finance, made a submission when that process was open or had any meeting with a person who might be in a position to change the rate in that time? To those that did, what did you get? I'd be interested to know if you also brought up Life Assurance Exit Tax and the 1% Governmemt Levy in those engagements.
We can talk about it until the cows come home here but it's not going to make any difference. The posters to the Redditt Irish Personal Finance sub seem to be way more militant. Maybe it's an age demographic thing.
If someone is drowning it's not much good describing the water.
Hands up all those who have contacted the politician they vote for, raised the rate with those who canvassed them at their front door, talked to the TD for their area, wrote to the DoF, Revenue or Minister for Finance, made a submission when that process was open or had any meeting with a person who might be in a position to change the rate in that time? To those that did, what did you get? I'd be interested to know if you also brought up Life Assurance Exit Tax and the 1% Governmemt Levy in those engagements.
We can talk about it until the cows come home here but it's not going to make any difference. The posters to the Redditt Irish Personal Finance sub seem to be way more militant. Maybe it's an age demographic thing.
If someone is drowning it's not much good describing the water.
There is no specific document for ETFs, that section describes the tax calculation for funds domiciled in Ireland.
4.2.3 Units held in a recognised clearing system (such as Exchange Traded Funds)
While the fund does not have to deduct exit tax, an Irish resident unit holder will be subject to tax on income and gains arising and must self-assess and include details of income and gains in a timely filing on their income tax return to Revenue.
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How certain can we be that the simplification is applied to individuals - section 4 seems to be targeted at fund companies - we know they can use it. Where the fund company doesn't pay the tax - then "an Irish resident unit holder will be subject to tax on income (taxable under Case III) and gains (taxable under Case IV)". Are we now falling outside the scope of this document's simplification.You can use either the unit price on the actual anniversary (1st Jan 2028, 1st Feb 2028, 1st Mar 2028...)
Or to simplify you can choose to use the unit price on the previous mid- or end-year (31st Dec 2027 is the easiest).
Part 27 - Sections 731-747F
4.3.1 What gain is taxed?
Where the chargeable event is the ending of an 8-year period, the value of the units at the time less their cost of acquisition (if the investment undertaking so elects, the value of the units at 30 June or 31 December prior to the date of the chargeable event).
If it does apply, unless you can use the average purchase price (?) you're going to have to make sure you have the correct growth amount for each individual purchase up to whichever anniversary date you chose. I.E for weekly purchases in year 8 you'll need week1 -> anniversary, week2-> anniversary...
The simplification is however more useful for the 8 yr -> 16 yr -> 24 yr ... anniversaries. As for them it is a single date in a year based calculation.
The provisions and example calculations set out in this document apply to Irish funds in general, of which Irish-domiciled ETFs are a subset. The Revenue note on ETFs simply refers you back to this document for the tax calculation and the Offshore Funds document for the treatment of the payment in your tax return.
The taxation of investments in ETFs
The purpose of this Tax and Duty Manual (TDM) is to guide investors to the relevant TDMs that will advise further on the tax treatment of an ETF:
1. For further information with respect to the tax treatment of Irish domiciled ETFs refer to TDM Part 27-01a-02 (Investment Undertakings) and TDM Part 27-04-01 (Offshore Funds: Taxation of Income and Gains from the EU, EEA and OECD member states);
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You can use average cost or FIFO as long as you use it consistently for each subsequent disposal.
4.3.2 Cost of acquisition of units
In general, for the purposes of calculating a gain on disposal of units held by an investor in an investment undertaking, whether a single fund or an umbrella fund, the average cost of units is used. However, the legislation gives an investment undertaking the choice of electing to use the first-in first-out (FIFO) basis.
Thanks for that @Corola. That is clear in respect of the position on exit tax. Slightly off topic but do you know is it the same with dividend income?
I declare dividends once a year and pay a small bit of tax on that. Is prsi and USC also due and if so, how do you pay it?
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I chose not to invest in EFT because of the admin headache this would cause if buying every month over the 8 years, but thought to simplify it by just selling the whole holding just before the 8 year of the first purchase and rebuy them all the next day reset the clock back to 8 years again and rinse and repeat.
This of course going to use low-cost broker and tax still have to be paid on the gain but much easier to manage doing this once every 7.9 years ( just before the 8years is hit)
This of course going to use low-cost broker and tax still have to be paid on the gain but much easier to manage doing this once every 7.9 years ( just before the 8years is hit)
I'm a bit confused. Can you provide a simple example showing how it makes a difference? Thanks.
If you crystalise gains before they are due then you don't benefit from subsequent decreases in the tax rate:
Take the example from before:
The first tranche of deemed disposals is due in 2028 on the first €6,000 bought in 2020.
The second tranche of deemed disposals is due in 2029 on the next €6,000 bought in 2021. And so on.
In 2032 the Finance Minister announces the exit tax rate is reduced from 41% to 35%. The fund is sold.
Person A made their deemed disposals as required.
Person B doesn't want to deal with yearly deemed disposals.
So since person B has realised gains early they have on average paid tax at a higher rate than person A.
Take the example from before:
The first tranche of deemed disposals is due in 2028 on the first €6,000 bought in 2020.
The second tranche of deemed disposals is due in 2029 on the next €6,000 bought in 2021. And so on.
In 2032 the Finance Minister announces the exit tax rate is reduced from 41% to 35%. The fund is sold.
Person A made their deemed disposals as required.
- The first four tranches bought in 2020-2023 have already paid their first deemed disposal (up to 2031) at 41%. The next four tranches bought in 2024-2027 haven't paid any tax yet.
- When all the tranches are sold, the first four will get a credit for the 6% difference between the tax rate paid (41%) and the tax rate due (35%). The last four tranches will be taxed at 35%.
Person B doesn't want to deal with yearly deemed disposals.
- They sell all the tranches in 2028 right before the first deemed disposal. This is an actual (not deemed) disposal so all the tranches pay tax at 41%.
- They rebuy the fund with the money remaining after paying the tax. All the tranches have their 8-year clock reset to zero.
- In 2032, the tax rate is reduced and Person B sells the fund.
- They pay tax at 35%, but only on the gain since they rebought in 2028, not since their original purchase date.
| Tranche | Person A | Person B |
|---|---|---|
| 2020 | 12 x 35% | (8 x 41%) + (4 x 35%) |
| 2021 | 11 x 35% | (7 x 41%) + (4 x 35%) |
| ... | ... | ... |
| 2027 | 5 x 35% | (1 x 41%) + (4 x 35%) |
So since person B has realised gains early they have on average paid tax at a higher rate than person A.
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Moreover, if an investment has compound growth you want to leave it untouched for as long as possible. Paying tax more often than you need to interferes with that.
Consider an investment into a fund of €100,000 growing at 5% p.a. for 8 years.
Person C holds the fund for 8 years, then sells.
Value at year 8 = 100,000 x (1.05^8) = 147,746
Tax = 41% x 47,746 = 19,576
Value after tax = 147,746 - 19,576 = 128,170
Net return = 128,170 - 100,000 = 28,170
Person D sells and rebuys the fund at year 4, then sells at year 8.
Value at year 4 = 100,000 x (1.05^4) = 121,551
Tax = 41% x 21,551 = 8,836
Value after tax = 121,551 - 8,836 = 112,715
Value at year 8 = 112,715 x (1.05^4) = 137,006
Tax = 41% x (137,006 - 112,715) = 9,959
Value after tax = 137,006 - 9,959 = 127,046
Net return = 127,046 - 100,000 = 27,046, a difference of €1,123
Consider an investment into a fund of €100,000 growing at 5% p.a. for 8 years.
Person C holds the fund for 8 years, then sells.
Value at year 8 = 100,000 x (1.05^8) = 147,746
Tax = 41% x 47,746 = 19,576
Value after tax = 147,746 - 19,576 = 128,170
Net return = 128,170 - 100,000 = 28,170
Person D sells and rebuys the fund at year 4, then sells at year 8.
Value at year 4 = 100,000 x (1.05^4) = 121,551
Tax = 41% x 21,551 = 8,836
Value after tax = 121,551 - 8,836 = 112,715
Value at year 8 = 112,715 x (1.05^4) = 137,006
Tax = 41% x (137,006 - 112,715) = 9,959
Value after tax = 137,006 - 9,959 = 127,046
Net return = 127,046 - 100,000 = 27,046, a difference of €1,123
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The exception is if you are in the situation described here:
You don't pay any tax, and all the tranches revert to year 0.