Exit tax event? Y/N? on the death of a joint owner (Irish married couple) of Exchange Traded Fund (ETF)

[Carrolll1000]

Hi All

Scenario 1:
If a married couple owned an Irish Domiciled ETF in a joint trading account and one of the couple was to die, would this death of one of the joint owners, trigger an exit tax event?

Scenario 2:
If a person owned an Irish Domiciled ETF and died, but left the ETF to their child, but the child’s inheritance was less than the threshold. Can the child carry forward the credit for when the second parent dies and leaves a second inheritance to that child, the second inheritance pushing the child’s total inheritance over the life time CAT free threshold? Is there a time limit within which this credit has to be used?

Thanks in advance.
LC

 

[AAAContributor]

I'd be interested in knowing the answers too.

This document potentially provides guidance on your scenarios but I can't vouch for how accurate it is:

https://www.brokerzone.ie/tax-treatment-of-unitised-investments-and-direct-investments.pdf
Scenario 1:

My interpretation of the section on death (page 2, Irish & Luxembourg UCITS column) is that death would be a chargeable event if a joint account owner dies and that 50% of the gain would be subject to exit tax.

Scenario 2:

For an ETF, interestingly, the guide has nary a whisper of the Section 104 CATCA credit and that the beneficiary would be subject to CAT on the net value (market value of the ETF on death less any exit tax paid by the executors). This does seem to be more punitive than if the investment was a unit linked investment bond. I'd like to know what basis is for the differing tax treatment (investment bond is subject to CAT on the gross value of the fund at death with a credit for exit tax vs ETF taxed on the fund value net of exit tax with no credit seemingly available).

If this guide is accurate and my reading of it is correct as it pertains to the second scenario you posit, then:

1. The child will have no liability to CAT on the first inheritance (as the value is below the Group A threshold);

2. On the second inheritance the child will add that inheritance plus the value of the first inheritance for aggregation purposes to assess where they stand in relation to any excess value of inheritances above the Group A CAT threshold.

 

[Carrolll1000]

I'd be interested in knowing the answers too.

This document potentially provides guidance on your scenarios but I can't vouch for how accurate it is:

https://www.brokerzone.ie/tax-treatment-of-unitised-investments-and-direct-investments.pdf
Scenario 1:

My interpretation of the section on death (page 2, Irish & Luxembourg UCITS column) is that death would be a chargeable event if a joint account owner dies and that 50% of the gain would be subject to exit tax.

Scenario 2:

For an ETF, interestingly, the guide has nary a whisper of the Section 104 CATCA credit and that the beneficiary would be subject to CAT on the net value (market value of the ETF on death less any exit tax paid by the executors). This does seem to be more punitive than if the investment was a unit linked investment bond. I'd like to know what basis is for the differing tax treatment (investment bond is subject to CAT on the gross value of the fund at death with a credit for exit tax vs ETF taxed on the fund value net of exit tax with no credit seemingly available).

If this guide is accurate and my reading of it is correct as it pertains to the second scenario you posit, then:

1. The child will have no liability to CAT on the first inheritance (as the value is below the Group A threshold);

2. On the second inheritance the child will add that inheritance plus the value of the first inheritance for aggregation purposes to assess where they stand in relation to any excess value of inheritances above the Group A CAT threshold.

Thanks for your reply. I too, found that document, but am not sure of the completeness/accuracy of it.

What you might also be interested to know is, in the Case of Scenario 1, under the column Irish unit linked investment bond1 (the same document you attached in your reply), if the account is held jointly, then the death of a joint account holder, does not give rise to an exit tax event. I was able to validate this, with one of the insurance companies offering this type of product. The thing is, these products are quite expensive.

 

[Carrolll1000]

Also found this on KBC's site in the FAQ section :
"
What happens with exit tax on the death of a unit holder?

Where the units are held jointly, the surviving unit holder becomes beneficially entitled to all the units and no exit tax is triggered. "

But again, not sure if it is accurate, considering they are leaving the market.

 

[AAAContributor]

I was aware alright that the policy would continue untaxed in the case of an insurance based investment product and also under the KBC investment fund.

I was being conservative in my interpretation.

Revenue have provided guidance to the insurers and financial companies that are taxing products at source.

You need to compare like-for-like and get confirmation that it also pertains to products in a clearing system not subject to tax at source (where the investor is accounting for the tax liability under self-assessment). Why would Standard Life not just have a cut-and-paste of the death treatment under both an insurance based investment product subject to exit tax and an ETF similarly subject to exit tax? There are obviously differences in treatment, assuming the guidance is accurate.

It would seem unfair if a different treatment applied to ETFs like in your example but perhaps you could send in a query to 'MyEnquiries' and report back on what Revenue advise?

 

[Gordon Gekko]

Hi All

Scenario 1:
If a married couple owned an Irish Domiciled ETF in a joint trading account and one of the couple was to die, would this death of one of the joint owners, trigger an exit tax event?

Scenario 2:
If a person owned an Irish Domiciled ETF and died, but left the ETF to their child, but the child’s inheritance was less than the threshold. Can the child carry forward the credit for when the second parent dies and leaves a second inheritance to that child, the second inheritance pushing the child’s total inheritance over the life time CAT free threshold? Is there a time limit within which this credit has to be used?

Thanks in advance.
LC

1) Yes, for 50% of it.

2) No, the credit would be lost.

 

[AAAContributor]

1) Yes, for 50% of it.

2) No, the credit would be lost.

Thanks Gordon.

Have you anything you could provide as back up for the second scenario to counter what Standard Life seem to be indicating? It seems to me that you are saying that a beneficiary is taxed on the gross value of the ETF on death and that a credit would be available (if there was a CAT liability at the time) but that it is lost if there was no CAT liability on that event.

Is the Standard Life guidance note inaccurate and that beneficiaries are taxed on the gross amount with a credit for the exit tax regardless of whether the product in question is a unit-linked investment bond through an insurance company or whether it is an ETF? For the purpose of this question, let's just assume that that beneficiary has used up all their threshold and that CAT of 33% is due.

If I work out the figures, the net proceeds received by a beneficiary would be much less under the ETF (if Standard Life is correct in their note). If we take a simple example of a fund purchased for €100,000 and with a market value of €200,000 on death (a €100,000 gain), then I calculate:

Details	Investment Bond	ETF
	EUR	EUR
Cost	100,000	100,000
Market value at death	200,000	200,000
Taxable gain	100,000	100,000
Exit tax payable	41,000 (deducted by life co)	41,000 (payable by executors)
CAT @ 33%	66,000 (on gross value)	52,470 (on net value)
s104 credit	41,000	0
Net CAT	25,000	52,470
Total tax	66,000	93,470
Net proceeds receivable by beneficiary	134,000	106,530
Tax as a % of gross inheritance	33%	47%

Seems crazy that there would be a different inheritance tax treatment for different products under the same tax head (exit tax) and that it is more logical that the tax treatment would be the same regardless of what product is the subject of the inheritance.

 

[Gordon Gekko]

No, that’s not what I’m saying at all. The credit only arises on the same event for the same asset. So the idea of it being carried forward etc isn’t correct in my view.

For a European ETF that cost €100k and is now worth €200k, there’d be a €41k exit tax credit against a €66k CAT liability for a child with no threshold left.

In my view, €159k of the child’s threshold would go if it was still intact.

The credit is covered by Section 104 and it sets out what happens, but only where there’s gift or inheritance tax. Where there’s no CAT, that rebasing calculation doesn’t happen (i.e. the €159k going back to €200k in the above example).

 

[Carrolll1000]

Thanks for the replies.

Please find attached from Revenue web site.

I refer to paragraphs :

4.2.3 Units held in a recognised clearing system (such as Exchange Traded Funds) Paragraph (III) of the definition of chargeable event in section 739B(1) provides that any transaction in relation to, or in respect of, units which are held in a recognised clearing system4 does not require the deduction of exit tax. This would be the case for an ETF where the units/shares in the underlying fund are bought and sold between investors on the stock market and are cleared through a recognised clearing system. 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. The unit holder will be subject to tax as set out in subparagraph 4.3.3. Where the investor is subject to tax, they must account for the tax directly to Revenue as follows:  Section 739G(2)(b) provides that where exit tax is not applied and the unit holder is an individual, the payment is treated as if it is a payment from an offshore fund (refer to TDM Part 27-04-01 for details regarding how to include such payments in a tax return).  Section 739G(2)(f) provides that where exit tax is not applied and the unit holder is a company, the payment is treated as income taxable under Case IV, Schedule D.

4.2.4 The transfer of units between spouses or civil partners Paragraph (IV) of the definition of chargeable event in section 739B(1) provides that the transfer by a unit holder of his/her entitlement to units in a fund will not give rise to a chargeable event where the transfer is between spouses or between civil partners. Neither will a transfer between spouses or former spouses or civil partners or former civil partners, where the transfer is by virtue of an order made following the granting of a divorce, dissolution or a judicial separation in the State or recognised as valid in the State. However, on a subsequent chargeable event, the then unit holder will be regarded as having acquired the units at the same cost as the original unit holder.

Thoughts:

So paragraph 4.2.3 talks about ETF's and who is responsible for reporting and paying tax.

Paragraph 4.2.4 then says that transfers of units between spouses, "will not give rise to a chargeable event....". So, to me then, it would make sense that if a couple jointly owned a trading account and one was to die, that this death, would not trigger a "chargeable event". Why would the death cause a "chargeable event", when, when both spouses are alive they can transfer units between each other and it does not give rise to "chargeable event". It just doesn't make sense that because one of them has now died that this would be any different.

 

[Gordon Gekko]

“So, to me then, it would make sense…”

There’s your issue.