Investment Trust options

[fistophobia]

Sorry... it is not, what it is.
Suggestions about writing to TDs are not helpful.
We are discussing ways to invest in investment trusts.
To help each other out.
There are always other options.

 

[RedOnion]

There are always other options.

Any suggestions, rather than talking in riddles?

 

[AJAM]

Coming back to the subject line....
I notice on Degiro I can still buy some investment Trusts e.g.
FGT, CTY, MYI and JGGI.
But I can't buy BNKR, MRC, FCIT, SMT, JEO, ATR, BGSC.
I did initially think Brexit, but shouldn't Brexit apply to all of them?

 

[Younginvestor93]

Coming back to the subject line....
I notice on Degiro I can still buy some investment Trusts e.g.
FGT, CTY, MYI and JGGI.
But I can't buy BNKR, MRC, FCIT, SMT, JEO, ATR, BGSC.
I did initially think Brexit, but shouldn't Brexit apply to all of them?

This is what I observed also. I emailed them but no response yet. It appears to be Brexit related according to Reddit but yes, surely that would apply to all of them. Strange!

 

[shades25]

I got this response from Degiro in relation to SMT:

With regards to <SMT> we had to remove this product from the Trader due to an ongoing issue with regards to the type of Financial Transaction Tax that is applied to this product. We are working with the issuer now to have this issue resolved and hopefully can offer this product on the platform again soon. This is one of our priorities as we are aware many clients are interested in this security.

 

[Marc]

I’d like to just check something if I may.

question: are U.K. investment trusts always subject to income tax and CGT?

if you think the answer is yes, please like the post
If not please set out your reasons below.
I’ll run this for say a week.

thanks

So, only two likes to the original post suggesting that some of you suspected a trap, and you’d be correct.

I picked out this thread because, as is often the case on AAM, it contained several confident and definitive statements about how U.K. investment trusts are taxed in Ireland.

As many of you will know, I’ve spent the last 12 years extensively researching this subject and the tax aspects of this post are based on analysis by one of the leading authorities on the taxation of investments in Ireland and once again I’m the bearer of bad tidings for those of you who think this is easy.


My primary concern is that many posts are framed on the basis that all investment trusts are CGT items and not funds from an Irish tax perspective. I would not be black-and-white on this, I think it is possible for investment trusts in the UK to be considered offshore funds, at least in theory.

The key component that would need to be present for an investment trust to be considered a fund (and I concede it is extremely unlikely for an investment to fall into these categories, but have seen it) are:


· They commit in their articles of association to operating an active discount management policy whereby they try to ensure that the company trades within a stated percentage of NAV.

If this stated percentage is in or around 5% that causes an issue.

Personal Assets Trust for example had this enshrined in their articles of association and therefore in the opinion of leading tax consultants in Ireland, is more likely to be a fund than CGT.

The original tax analysis was conducted when the U.K. was still in the EU and that had implications for marketing which I will cover below

Once you get into Guernsey etc. then you are into different tests, and the only test you need to meet to be a fund is if you could expect to realise the value of your investment at some point during the next 7 years (that being an amount that is reasonably approximate to the NAV of the company's underlying assets). If you meet this test then it is considered a fund and liable to top rate income tax for Irish taxpayers. I would expect that most if not all investment trusts domiciled in Jersey/Guernsey etc. are considered funds on that basis; unless they habitually trade at really significant discounts or premiums to NAV (to such an extent that it would be unlikely they would ever trade close to NAV in the next 7 years) then you have an offshore fund.

The next consideration is if you are Irish and married to a UK domiciled spouse or Civil Partner - like my wife for example.

UK Inheritance Tax
Investment companies domiciled in the UK are subject to UK Inheritance tax at a rate of 40% for portfolios in excess of the nil rate band currently £325,000 (tax year 2020-2021).
Under the terms of the double taxation treaty between the UK and Ireland, tax is based on the following principles; where the property is not situated (in this instance Ireland) gives a credit and the jurisdiction where the property is situated taxes.
It should be noted that any UK Inheritance Tax payable is not deductible as a liability in calculating the amount of CAT payable - it can only be used as a credit against CAT in Ireland only when the same property is taxed in both countries.

Spouse or civil partner exemption: spouse or civil partner domiciled outside UK

Where, immediately before the transfer;
the transferor is domiciled in the United Kingdom, or is treated as domiciled in the UK under IHTA84/S267, but the transferor’s spouse or civil partner is neither domiciled nor treated as domiciled in the United Kingdom the exemption for transfers between spouses and civil partners is restricted. Where the transfer is on or after 6 April 2013, the exemption is limited to the nil-rate band that applies at the date of the transfer.
Where the transfer was on or after 9 March 1982 and before 6 April 2013, the exemption was limited to £55,000.
This restriction to the amount of the exemption does not apply if;
both the transferor and their spouse or civil partner are domiciled outside the UK, or
the transferor is domiciled outside the UK but the spouse or civil partner is domiciled in the UK

This means that if both spouses are not UK Domiciled i.e. Irish Nationals the full spouse exemption applies.


The final issue to consider which I have repeatedly try to flag in the run up to Brexit is our good EU regulation friend PRIIPs.

In order to distribute a U.K. investment trust to a retail investor there must be a PRIIPs KID document no document and the fund cannot be sold across the EU,

The Brexit trade “deal” excluded financial services so until that section is negotiated its impossible to say if U.K. investment trusts will survive to the end of this year for Irish investors.

The U.K. regulator, the FCA, had already made it clear that it is looking to extend the exemption from PRIIPs for U.K. UCITS by 5 years but Investment trusts continue to labour under the highly misleading disclosure regime (FCA official view)
If the association of investment companies manages to negotiate an exemption from PRIIPs then its game over for Irish investors.

happy to provide an alternative for those looking to take advice on this

www.globalwealth.ie

 

[RedOnion]

happy to provide an alternative for those looking to take advice on this

I'm going to be honest here Marc. I'd have my doubts about asking you for any advice after your analysis of PRSA's, which you failed to come back on once you were questioned: https://www.askaboutmoney.com/threa...-any-tax-relief-possible.221628/#post-1698462

This was the basis of one of the most complex pieces of advice I've ever seen recommending an 18 year old start a PRSA, on the basis that's get tax relief even without income. I believe this is the thread where you were 'shouted down' in regards to UK Investment Trusts, and Brexit.
In my humble opinion (I haven't spent 12 years studying this) is that is all based on completely false analysis of the tax treatment: https://askaboutmoney.com/threads/18-year-old-best-investment.221632/

 

[Marc]

Two small points

I’m not obliged to respond to every question/personal attack
I was writing that post with a fever that I later discovered was Covid and put me in intensive care

 

[RedOnion]

I was writing that post with a fever that I later discovered was Covid and put me in intensive care

I'm sorry to hear that, and I hope you've made a full recovery.

 

[Sarenco]

I think it is possible for investment trusts in the UK to be considered EU funds, at least in theory.

How could an investment trust domiciled in the UK be considered an EU fund when the UK is no longer a member of the EU?

I don't buy the argument that the operation of a discount control mechanism means that an investment trust could be deemed to be a fund. But even if it does, it's a moot point.

The tax treatment of investments in funds domiciled in the US, EEA and other OECD countries (including the UK) follows precisely the treatment that would apply to share investments generally i.e. income and capital gains tax treatment as appropriate.

If the association of investment companies manages to negotiate an exemption from PRIIPs then its game over for Irish investors.

That's a possibility in the future but how does this impact Irish investors today?

 

[Sarenco]

As things stand today, a KID must be provided to retail investors in an investment trust.

The UK implemented the EU's PRIIPS Regulation back in 2018 and it was subsequently "onshored" so that it continues to apply as a matter of UK law post-Brexit.

So nothing has changed from a regulatory point of view.

Last July, the UK Treasury indicated that it intended to bring forward amendments to the onshored PRIIPs Regulation to improve the functioning of the PRIIPs regime in the UK
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/905542/Policy_Statement_-_PRIIPs__July_2020__HMT_Template.pdf

However, there is no proposal to remove the requirement that a KID must be provided to retail investors in an investment trust.

 

[joe sod]

That's a possibility in the future but how does this impact Irish investors today?

I don't understand this point , that if the associaton of investment companies negotiates an exemption from PRIIPs?, is this the associatian of investment companies in Ireland, UK or Europe? Why is this a game changer since the requirement for PRIIPs is only a fairly recent development I think? In any case would UK investment trusts not just resort to the same status as US ETFs and US closed end funds unable to be purchased by EU brokerages but still able to be traded by UK brokerage accounts. Thank you all the same for providing all this information @Sarenco

 

[Sarenco]

@joe sod

The Association of Investment Companies (AIC) is the representative body for investment trusts in the UK.

PRIIPs is a creature of EU law. As the UK is no longer an EU member state, it is not obliged to apply the PRIIPs Regulation. However, the UK decided to "onshore" the PRIIPs Regulation so that it continues to apply as a matter of UK law post-Brexit.

In theory, the UK could repeal the onshored PRIIPs Regulation so that UK investment trusts would no longer be required to produce a KID. If investment trusts stopped providing a KID, they could no longer be offered to Irish retail investors.

However, there is no indication whatsoever that the UK intends to repeal the onshored PRIIPs Regulation.

 

[Younginvestor93]

In layman's terms? What's the story with the IT's then. Are they a valid investment vehicle or it is up in the air until after we get clarification?

 

[Steven Barrett]

In layman's terms? What's the story with the IT's then. Are they a valid investment vehicle or it is up in the air until after we get clarification?

The easiest way to know is to log onto your online broker and see if they are there. DeGiro offers a few but not many, but then, they don't offer a lot of bog standard funds either.

There is nothing illegal about owning investment trusts or US domiciled etfs. there is an obligation on the provider/ advisor to provide you with this document. If we don't, we will be fined if audited by the central bank. Nothing will happen to the customer for owning them, they are perfectly legitimate investment vehicles.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

 

[galway_blow_in]

i see that city of london investment trust is available to buy with saxo but only as a CFD ?

its available as a fund too but presumably that is different than just buying it like you would a stock ?

if trusts like this which you could previously purchase like an equity are now listed as funds ( FND ) , would these incur new kinds of charges - fees ?

 

[spacecolm]

Background: I'm maxing out my PRSA, have a tracker mortgage at +0.8% that I don't intend paying off early, have lump sum to invest and €10k annually to invest.

I'm trying to grapple with investing in an investment trust or EFT also.

I've put together figures and I am only a beginner investor so please point out anything I have gotten wrong.

They are based on following assumptions:

Initial investment of €100,000
Average annual return of 10%
Annual dividend payment of 2%
IT total annual fees of 1.56% (based on figure posted earlier in this discussion)
IT dividends are taxed at 51% (then reinvested); ETFs are reinvested without being taxed
I don't have any annual fees for EFT....should I?
EFT requires capital gains taxation of 41% after year 8 (which I have taken from fund because I won't have that amount of money lying around)
IT does not require any capital gains tax payment after year 8....only when sold

I've run that scenario for 16 years.

The figures after year 8 show how much CGT would have to be paid on IT at this point but don't reduce the fund by this amount for subsequent years:

	IT	ETF
Invested	100,000​	100,000​
Year 2	109,264​	112,000​
Year 3	119,386​	125,440​
Year 4	130,446​	140,493​
Year 5	142,531​	157,352​
Year 6	155,735​	176,234​
Year 7	170,162​	197,382​
Year 8	185,926​	221,068​
tax	28,356​	49,638​
total if sold	157,570​	171,430​
Year 9	203,150​	192,002​
Year 10	221,970​	215,042​
Year 11	242,533​	240,847​
Year 12	265,001​	269,749​
Year 13	289,551​	302,119​
Year 14	316,375​	338,373​
Year 15	345,684​	378,978​
Year 16	377,708​	424,455​
tax	91,644​	83,389​	rebate of 49,638 from 8 years previous
total if sold	286,065​	341,066​

The EFT comfortably out-performs the IT at both year 8 and year 16 - bear in mind I removed 49,638 from the EFT to pay the CGT after year 8 but it still outperforms IT.

The 1.56% management fee destroys the performance of the IT.

Even at 1% management fee, IT can't compete under realistic assumptions.

Even if you think inflation is going to roar, EFT beats IT if there is an average annual return of 20%

The only way that IT beats EFT in this model if is average annual return is around 25% which I think is unrealistic (and I'm expecting a lot of inflation post covid).

Spreadsheet is attached

Is there something I'm missing?

 

[jpd]

Average annual return of 10% + 2% dividend seems quite optimistic to me but who knows?

There is a tax of 41% on the ETF dividends that does not seem to be taken into account

 

[spacecolm]

Average annual return of 10% + 2% dividend seems quite optimistic to me but who knows?

There is a tax of 41% on the ETF dividends that does not seem to be taken into account

Thanks for the reply.

I didn't tax the EFT dividends because AFAIK an accumulated EFT doesn't have to pay tax on dividends - they are reinvested and the total fund is caught for 41% tax at year 8.

If I half average annual return and dividends, ETF are still clear winner

 

[RedOnion]

The 1.56% management fee destroys the performance of the IT.

Even at 1% management fee, IT can't compete under realistic assumptions.

Even if you think inflation is going to roar, EFT beats IT if there is an average annual return of 20%

If you change your assumptions, you get a different answer. So check the assumptions.

For a large IT that tracks an index, a 1% management fee would be closer to reality.
You need to include a .2% charge for the ETF.
I think a globally diverse portfolio currently has a dividend yield somewhere around 1.5%
And have a look at what happens when you roll your model out beyond 16 years. The longer you're invested, the bigger the impact of those deemed disposals.

By the way, you've set it up that you've no return in year 1?