Is the 41% Exit Tax Soon to be Scrapped? Michael McGrath to Review

Zenith63 said:
Under the CGT regime the gain dies with you, so only CAT is paid. Under Exit Tax you pay 41% on the gain then CAT on what remains. That means quite a bit more tax to the exchequer.
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There is a credit against CAT for Exit tax paid on death of the policy holder arising out of a plan. A note to this effect was posted by @GSheehy previously.
 
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You are right that I am not looking for revolution and not because I am a reactionary old duke.
Your revolutionary proposal can be summed up as follows.
"Look, you guys haven't a clue how to invest money. Postpone taxation of the punters who do as long as possible. You will nearly get the same tax anyway albeit maybe 10 years later, but the punters will be so much happier".
Good luck with that!
 
Am I correct that the current system is especially unfavourable to people over 65? A married couple over 65 might like to use some savings they have to generate extra retirement income. They could buy a few high dividend yield shares or a buy-to-let house. If their total income is still below the over 65s exemption limit of €36k (for a couple), they would pay no income tax on this. If they instead put the savings into a fund, such as a distributing ETF, they would pay 41% tax on the income (and also have the hassle of deemed disposal every 8 years). While this is, as has been said, "tax consideration over investment decision", in this case the tax has a substantial effect and so it is reasonable that the tax would be a large factor in the decision.
 
This is a very significant consideration.

Many of our clients in retirement only typically pay income tax and USC at around 22% rather than 41% exit tax and with income tax credits and credits for DWT overseas this brings the average rate down to around 9%pa typically
 
It's the main point in my submission...
Do you think it is fair that people at the basic tax rate have to pay 41% tax on dividend income ?
Everyone in the industry knows these are equities.
 
Itchy said:
I think it was a similar document but Irish Life. Your document notes the credit available for exit tax paid.
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Sorry yes I’d factored that in when looking at the numbers.

€100,000 investment that has grown to €150,000 and the owner dies and passes to one of their children, assuming other assets so lifetime CAT allowance not available.
Under CGT the tax paid would be €150,000 * 33% CAT = €49,500.
Under Exit Tax the first tax paid would (€150,000 - €100,000) * 41% = €20,500 then CAT would be due on the remainder so (€150,000 - €20,500) * 33% = €42,735 for a total tax take of €63,235 or 27% more than under the CGT regime.
 
That post on the ILAC guide is here and the example they give is:

On Joe Smart’s death his original investment of €100,000 in a Life Bond has achieved a gross investment return of 50% i.e. gross value €150,000 leaving a net €129,500 after payment of €20,500 Exit Tax at 41%.

Let’s assume he leaves this investment to his daughter Lucy. Assuming Lucy has received additional inheritances and therefore used up her tax free threshold the full value of the bond is liable to Inheritance Tax at 33%.

Lucy is deemed to have received a taxable inheritance of €150,000 from which €20,500, Exit Tax, has been deducted. The Inheritance Tax liability is calculated based on the ‘gross value’ i.e. €150,000, on which the estimated Inheritance Tax liability at 33% is €49,500. This amount can then be reduced by ‘offsetting’ the ‘Exit Tax’ of €20,500 (in this example) which has been deducted.

Gerard

www.bond.ie
 
Thanks Gerard. In that example the total tax paid would be €49,500 - €20,500 = €29,500, considerably less than the €49,500 due under the CGT regime. That doesn’t my sound right does it? Edit: The tax paid would actually be €20,500 + (€49,500 - €20,500) = €49,500, so the same as the CGT regime.

Also I note in the Standard Life document they differentiate between Exit Tax on ETFs and Exit tax on investment bonds. Is it possible that ILAC example maybe does not apply to Exit Tax applied to ETFs (it mentions bonds)?
 
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Thats a point not often illustrated that since 2003 the irish government has been collecting taxes on inflation, therefore that is a wealth tax anyway by stealth as you are paying 0.6% tax every year on the principle, not just on the gains and the income. Whatever about the ludicrous exit tax regime , Ireland is also way out of line even regarding CGT at 33%. They also need to get exposed on this especially as they are not allowing for inflation.

Ireland gets alot of international attention regarding very low corporation taxes and the inference that it is a tax haven . Maybe exposure on this issue of very high investment taxes would be an embarrassment for the authorities. We know from experience the authorities here don't like ridicule in the international financial media and are quick to react and make changes to take themselves out of the limelight
 
99.9% of the Irish population don’t care about this and most of those that have a reason to care apparently care very little. Why would people from other countries give a hoot?
 

I've no reason to believe it's not accurate.

ILAC, SLAC or any other Life & Pension company wouldn't be too bothered about how exit tax applies to the direct purchase of EFTs by individuals (it's not their patch), no more than those individuals are bothered about the 1% Government Levy on Life Assurance contracts.

The overwhelmimg majority of submissions via the consultation will be from individuals who buy ETFs directy. I would say that the life & pension providers won't (individually) make a submission and I'd not be too confident that their representative body will either.

I was told a few years ago that any change to this tax regime would probably be brought about by individual/s lobbying, rather than industry.


Gerard

www.bond.ie
 
Seems I was a bit mathematically challenged over the weekend, it's not the case that Exit Tax+CAT would be less than CGT+CAT on death if a credit is available. The tax collected would be identical.

So the only question is whether there is a credit available or not. That Standard Life document I linked to is a bit of a mess, so as you say may not be too trustworthy. For example they have a note on their ETF example saying it is assumed to be a UCITS ETF domiciled in Ireland but not operating Irish Exit Tax, but then goes on to refer to Exit Tax in the figures. Chartered Accountants Ireland state that a credit is available - https://www.charteredaccountants.ie/taxsourcetotal/taxpoint/features/2021/02/2021-02-2.html
 
Zenith63 said:
So the only question is whether there is a credit available or not.......Chartered Accountants Ireland state that a credit is available -
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That's correct, a credit is available for an inheritance of an ETF.

As far as I can see, the article does not refer to the legal basis on which a credit is available on a UCITS ETF but for reference it is contained in Section 747E(5) of the Taxes Consolidation Act:-

No 39 of 1997, Section 747E, Disposal of an interest in offshore funds.

Disposal of an interest in offshore funds.
www.charteredaccountants.ie

If a beneficiary receives a UCITS ETF from an estate, the executor/administrator will be responsible for discharging the 41% tax as part of the finalisation of the deceased's tax affairs, and provided the beneficiary retains the ETF for at least 2 years, the 41% tax paid by the administrator is available as a credit against CAT payable by the beneficiary (that is attributable to the ETF) (per Section 7417E(5) above & Section 104 of the CAT legislation).

However, I understand that if the executor sells the ETF as part of an estate tidy up and passes the net proceeds to a beneficiary, the benefit of the credit could be lost and could result in significant additional tax cost.
 
This would possibly affect me, but I wont care, because I will be dead.
How would an executor pass ETF assets to a beneficiary, without first selling them?
 
fistophobia said:
How would an executor pass ETF assets to a beneficiary, without first selling them?
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An in-specie transfer by the deceased's broker on receipt of probate from the executor I would guess; similar to the third option offered here:-

What to do in the event of the passing of a DEGIRO account holder? | DEGIRO

www.degiro.co.uk

Not all brokers may facilitate this so it would have to be confirmed on a case-by-case basis.

As regards a life policy (with investments subject to 41% tax) as distinct from an ETF, it is not possible for the policy to be retained by a beneficiary and must be cashed in. Revenue do allow an exception to the retention condition for these policies (see 15.2 here):-


If an executor was administering an estate requiring the distribution of an ETF and an in-specie transfer could not be executed for purely administrative reasons, then it would be worth getting advice on this as it wouldn't be dissimilar to the exception for the life policy.
 

Revolut now offering easy access to ETFs including Vanguard - pitfalls?

Looks like an easy way into ETFs but no info as to how the 7yr deemed disposal works - do investors normally need to handle/declare this themselves on Form 11? Want to put 10k or so in, though Revolut seems to change T&Cs a lot which gives me room for pause. Any thoughts?
www.askaboutmoney.com

more evidence that the deemed disposal rule regarding ETFs is now effectively unenforceable. If revolut are now offering a simple mechanism to buy shares and ETFs and if so many young people already have revolut banking it is beyond doubt that many will also dabble in buying shares and ETFs. Of course the wisdom of holding large portfolios on revolut is another argument.
However the authorities more than ever will now be relying on people to do their own self assesment tax returns as the likes of revolut and degiro will not be doing the complex deemed disposal returns and paying the tax over like the legacy irish brokers. Therefore it is actually in revenue's own interests to simplify this whole area or else they are like King Canute trying to hold back the tide
 
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