ETF Returns & Irish Taxation

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KBIreland

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The tax treatment of Irish Domiciled ETF investments (8 year deemed disposal, 41% exit tax) has a big effect on your returns.

Initial Investment: €10,000
Annual Gain: 10%
Investment Period: 24 Years.

Under the current Irish tax treatment you would end up with €46,970.

If your investment was taxed under CGT with no 8 year deemed disposal you would end up with €70,563.

Workings: https://imgur.com/sKkykKH
 
Are the workings correct?

I think it is much more complicated than shown in the spreadsheet.
You do not have to cash in the funds after years, if you have funds elsewhere to pay the tax.
Also the gains after 16 and 24 years are usually calculated from the amount of the initial investment with credits for the tax paid on earlier deemed disposals - "deemed" not actual disposals

In any case a lot of the difference come down to the difference in tax rates 41 v 33

And the assumption of a growth rate of 10% annually over 24 years is a bit out of the ordinary

But I don't disagree that the EXIT tax regime is very penalising on investors in Ireland
 
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@jpd

I have kept the workings basic just to highlight the difference.

Having cash elsewhere to pay the tax means that these funds are likely not getting a good return and having to have the cash available when the tax is due is another consideration which impacts upon investment choices so it impacts on the amount of money you have in Year 24 so to keeps things simple I will pay the tax out of the ETF funds.

Even if the exit tax was also 33% (= CGT Rate) the net amount at the end of the 24 year investment period is still less under the 8 year deemed disposal system (€55,096 v €70,563).

Basically the 8 year deemed disposal is a major negative for anyone wishing to invest over a longer time frame (24 years in my workings).
 
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You are correct in that Deemed disposal is a big negative but your workings are incorrect as JPD has pointed out. Deemed disposals from 2nd onwards are a bit more complicated than you have shown.

Steven
www.bluewaterfp.ie
 
@SBarrett I will do the workings and post them taking into consideration part disposals (as I want to pay the tax from the investment in the workings) and credit for tax paid in prior deemed disposal periods. My main reason for posting is the effect the 8 year deemed disposal has on long term investments.
 
The Guidance note from the Revenue which is referenced in Steven's guide has moved and is now here https://www.revenue.ie/en/tax-profe...ins-tax-corporation-tax/part-27/27-01a-03.pdf

It isn't exactly clear how you calculate the tax if subsequent to the deemed disposal, you encash some shares to actually pay the tax. Presumably you can offset the tax due on the actual disposal by a proportion of the tax paid on the deemed disposal - but who knows?
 
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It depends on the context for the calculation, but if the context is the one most people on here tend to ask about - buying some simple index ETFs vs building a basket of shares yourself - you might also consider:

  • 1% stamp duty at purchase and sale of individual shares, none on ETFs
  • Dividend income would attract your top rate of tax (51%?) every year for the individual shares calculation vs. 41% at each deemed disposal for ETFs. To make a fair comparison you would need to assume selling some of your individual shares to pay this tax each year. The S&P500 has a dividend yield of somewhere around 2% the last decade or two for reference.
  • 10% is not likely over that time period and may make the difference feel bigger, I think 5% would be more realistic?
  • With a number of brokers purchasing ETFs is virtually free, individual shares will not be and buying small lots to achieve a diversified portfolio (to match an ETF) will be even more expensive as there is generally a minimum commission
  • More difficult to factor in but worth considering -
    • It will be difficult to build a basket of shares yourself to meet the diversity/risk-mitigation that a global ETF would give. What is the opportunity cost to building a portfolio of shares that does not perform or has unnecessary risk?
    • You will spend significant personal time rebalancing your portfolio (research and actual buying/selling admin effort including annual tax returns), dealing with dividends etc etc.
    • Costs to access all the exchanges you would need to to match a global ETF

There's no doubt that ETFs are less tax efficient than individual shares, but personally I think they are a far better buy for the vast majority of retail investors.
 
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Thanks for the link @jpd.

I'm assuming that the investor has no other cash/investments from which they pay the tax liability and on each deemed disposal date there is an actual disposal equal to the tax liability at that point.
 
All fair points @Zenith63 and especially the last point where the time to put together a good allocation of assets and subsequently re-balance them periodically is something I'm not looking to do at the moment. While I would invest in some companies directly that may also be in an ETF I hold the bulk of my investments will be in ETFs. For someone with a 24 year investment horizon I am looking to get a rough idea of the returns I can expect by plugging in some estimated figures and will start with reducing the annual growth to 5% as it will impact on the results too heavily at 10%.
 
jpd said:
It isn't exactly clear how you calculate the tax if subsequent to the deemed disposal, you encash some shares to actually pay the tax. Presumably you can offset the tax due on the actual disposal by a proportion of the tax paid on the deemed disposal - but who knows?
Click to expand...
You can. In fact, you can claim a rebate if it turns out that you made a loss.
Zenith63 said:
1% stamp duty at purchase and sale of individual shares, none on ETFs
Click to expand...
That only applies to shares in Irish companies (0.5% in the UK) - ETFs also have to pay stamp duty on Irish company shares.
Zenith63 said:
Dividend income would attract your top rate of tax (51%?)
Click to expand...
55% is the highest marginal tax rate here.
Zenith63 said:
There's no doubt that ETFs are less tax efficient than individual shares
Click to expand...
Not necessarily. It very much depends on your marginal tax rate and the assumptions you make around the contribution of capital gains and dividend income to your total return.

The article that I posted earlier has a link to a spreadsheet that you can play around with to show the impact of different assumptions.
 
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Appreciate that @Sarenco. I'm working through a table from the tax and duty manual at the moment but will get to your article and spreadsheet after that.
 
I did actually claim a rebate in 2015 when I sold an ETF which I purchases in 2005 and paid tax on a deemed disposal in 2013. The tax was paid from other sources so I didn't need to sell any ETF shares. I had to contact Revenue to ask where to put the reclaimed tax on my Form

What I was unsure about was how to account for selling shares to pay the tax on a deemed disposal - especially if the disposal was not on the same date as the deemed disposal
 
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jpd said:
I did actually claim a rebate in 2015 when I sold an ETF which I purchases in 2005 and paid tax on a deemed disposal in 2013. The tax was paid from other sources so I didn't need to sell any ETF shares. I had to contact Revenue to ask where to put the reclaimed tax on my Form

What I was unsure about was how to account for selling shares to pay the tax on a deemed disposal - especially if the disposal was not on the same date as the deemed disposal
Click to expand...

For those investing through a life company, if you have overpaid in tax due to deemed disposal, the life company will look after the tax for you and pay you the correct amount without you having to reclaim it from the revenue.

I've had that Revenue document on my "To read" list for a while now. Haven't gotten too far into it. It's not that straight forward!

Steven
www.bluewaterfp.ie
 
It is not that difficult once you have a little bit of knowledge from that Revenue document and some excel skills. It gets tricky on the second deemed disposal onwards, assuming there is a growth in the value of the ETF from one deemed disposal period to the next and the person is looking to dispose of enough units of the ETF to meet the excess exit tax above their tax credit amount from the previous deemed disposal payment and cover the exit tax due on the actual disposal at the time of the deemed disposal we are doing the calculations for to leave a net tax position of €0. I'll have to put together an excel workbook that can be used in different scenarios.
 
I have more or less given up on ETFs - I might use the current market to close out some of my old positions and pay the reduced tax due.

Then just re-invest directly in a parcel of shares - a real pain in the ....
 
I don't like paying the Exit tax - it seems exorbitant to me compared to the taxes involved in direct investment in shares, etc. All my ETF investments were made back in the 2000s and while I would like to add to them, I now avoid them and make direct investments in shares. This is not ideal but it is the best I can do to protest at the Exit tax regime.

If it was more widely known, I guess more people would complain but as the vast majority of the Exit tax investments are in Irish funds, most people are only vaguely aware so it passes unnoticed
 
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