ETF Deemed Disposal Example

Enthrope

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Hello,

I've spent a lot of time reading back over threads and now I think I know how Deemed Disposal works. Could someone tell me if this is right or wrong?

If you buy one unit of the same accumulating EU Domiciled ETF per year over 8 years, and to keep things simple we'll say it increases in value €10 every year:

2012: €120--------2015: €150--------2018: €180
2013: €130--------2016: €160--------2019: €190
2014: €140--------2017: €170--------2020: €200

In 2020 on the date exactly 8 years after I purchased the fist unit I have two options:

1. Make a deemed disposal of all units, and pay the 41% tax due:

Total Cost of 8 Units: €1240
Total Value in 2020: €1600
Profit: €360 so tax due at 41% = €147.60
Since I have made a deemed disposal on all units this allows me to forget about things for another 8 years

2. First in First Out: Make a deemed disposal of the one unit I bought 8 years ago:

2012: Cost €120
2020: Value €200
Profit: €80 so tax due at 41% = €32.80
This means I will have to do again next year, and every year that I own the fund.

Can anyone confirm if this is correct?
A lot of people say that making tax returns on ETF's is extremely complicated, but if Option 1 is possible it doesn't seem to me too difficult to do every eight years.

Thanks
Enthrope
 
Enthrope,
Others on AAM may be far more knowledgeable than I am on this and may be able to offer a professional opinion but my understanding is this:
Every purchase you make of a UCITS ETF triggers a tax event, in this case the 8 Year Deemed Disposal (presuming you hold the ETF for longer than 8 years; when you sell it you will pay 'actual' Exit Tax, rather than 'deemed' Exit Tax.)
So, a purchase made in 2012 falls due for Deemed Disposal Exit Tax in 2020. You pay tax on the 2012 purchase in 2020 and the 8 year clock is reset, so to speak.
A purchase made in 2013 falls due for Deemed Disposal Exit Tax in 2021. You pay tax on the 2013 purchase in 2021 and the 8 year clock is reset.
You don't add up all the purchases that are made within that 8-year period and pay tax at the end; each purchase triggers its own 'standalone' tax event.
That is, as I say, mu understanding of the Deemed Disposal rule. Indeed, I would welcome any correction if I am mistaken.

Purchasing UCITS ETFs may be relatively easy to manage and account for if an investor makes one or two purchases of an ETF every year. However, if an investor wishes to make more regular purchases, say monthly, then the book-keeping and accounting may require a more disciplined approach.

Hope this is of some help.
Cormac
 
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So, Option 2 from your above illustrations is, I believe , correct.
Should have included that in my previous post, apologies.
 
Option 1 would make it a lot simpler. But I've never seen that proposed as acceptable.

I can see why revenue could accept option one, it's as if you sold them all and bought them again. You reset the eight year clock and pay all the tax.

Do you have a source what you saw option one proposed.
 
There is absolutely nothing to stop you actually selling them all in 2020, paying the tax due and repurchasing them again the next day. The only downside is that you will incur fees when you sell and repurchase and you may end up paying taxes before they are due.
 
In addition to fees, there is the hassle, and the risk of market movement while you execute it. It would be great if revenue accepted option 1. Given that we can buy+sell, and it is deemed disposal, I think revenue should accept it. But I would not use it without revenune approoval.

OK, you lose some of the tax free growth, but until your holdings are big enough, it may make sense.

If it was acceptable, I think people would also then do 'timed' deemed dispoosals, to reset the 8 year clock, when values fall back to cost.
 
Has anyone ever written an angry letter to revenue about the absurdity of deemed disposal?
 
Hello,

I've spent a lot of time reading back over threads and now I think I know how Deemed Disposal works. Could someone tell me if this is right or wrong?

If you buy one unit of the same accumulating EU Domiciled ETF per year over 8 years, and to keep things simple we'll say it increases in value €10 every year:

2012: €120--------2015: €150--------2018: €180
2013: €130--------2016: €160--------2019: €190
2014: €140--------2017: €170--------2020: €200

In 2020 on the date exactly 8 years after I purchased the fist unit I have two options:

1. Make a deemed disposal of all units, and pay the 41% tax due:

Total Cost of 8 Units: €1240
Total Value in 2020: €1600
Profit: €360 so tax due at 41% = €147.60
Since I have made a deemed disposal on all units this allows me to forget about things for another 8 years

2. First in First Out: Make a deemed disposal of the one unit I bought 8 years ago:

2012: Cost €120
2020: Value €200
Profit: €80 so tax due at 41% = €32.80
This means I will have to do again next year, and every year that I own the fund.

Can anyone confirm if this is correct?
A lot of people say that making tax returns on ETF's is extremely complicated, but if Option 1 is possible it doesn't seem to me too difficult to do every eight years.

Thanks
Enthrope

Its the 8th year anniversary of the date of purchase.

Each ETF purchase is treated separately.

In year 8 and 16 you have a deemed disposal of the first ETF.

In years 9 and 17 you have a deemed disposal of the second ETF.

Basically in your plan you will have a deemed disposal each year from year 8 assuming you don't sell any of your ETFs and from year 16 you will have a deemed disposal on two ETFs (the one you bought in Year 1 and the one you bought in Year 8).
 
Does anyone have any experience/opinion of the bookkeeping/accounting required if one was to make regular purchases of a UCITS ETF? Whilst I have no doubt it is doable, I would wonder about what level of headache one is setting oneself up for? With a disciplined approach to record and bookkeeping, how manageable would it be?
 
Enthrope,

I stumbled across Irish Life literature which suggests Option 1 is correct but I'm no expert so open to correction... They don't use an ETF in the example but I cans see no reason why the same calculation would not apply ([broken link removed]):

If a top up is applied to the plan, is the top up amount subject to the deemed charge on the 8th anniversary of the contract or the 8th anniversary of the top up?
The deemed charge is calculated based on the TOTAL value of the contract at every 8th anniversary of the date of entry of the contract, regardless of any top ups. Example of a deemed charge after a top up:
€50,000 paid to Irish Life in May 2010 by a personal investor. €500 is paid to Revenue and €49,500 invested in an Irish Life investment bond
In June 2017 the investor paid an additional €10,000 to Irish Life, €100 of which was paid to Revenue and €9,900 was invested in the existing plan.
In May 2018, on the 8th anniversary of the plan, the deemed charge is deducted from the value of the plan
The value of the plan on 1st May 2018 is €72,000
The chargeable gain for the purposes of calculating the deemed charge is calculated as : €72,000 - (€49,500 + €9,900) = €12,600
The deemed exit tax charge is calculated as : €12,600 x 41% = €5,166
€5,166 is deducted from the value of the contract and paid to Revenue The gross value of the plan after the encashment is €66,834
 
An insurance type of product as you describe here is quite a different product from an ETF

Both are subject to Exit Tax at 41% but the mechanics of the calculations are different
 
Hi Enthrope, Did you ever get any further clarification if option 1 is possible. Did you ever follow up with revenue (via MyAccount or similar) to get an official response?

I think option 1 (without having to actually sell them) would be very useful for people who want to start building an ETF portfolio, but are put off by the amount of work/complexisty of the bookeeping doing a FIFO 8 year deemed disposal.

Option 1 would mean folks only have to deal with a tax event every 8 years, and the tax calculation would be a lot simpler.
 
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