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

[camlin90]

Interesting to see the prevalence of socialist thought - and as always it's diected at the working middle class, who are those hit by 41pc exit tax on an ETF because they don't have the scale to efficiently structure their affairs.

The excuse given in the media is laughable and demonstrates they couldn't even be bothered coming up with something credible.

There is no incentive to save in these products between a 1pc levy on entry (for a life assurance product), 41pc on exit with no relief on losses, and the product charges. All that on capital which has been taxed at roughly 50pc already because that's what you pay on any earnings beyond subsistence levels for a family.

This reflects the overall lack of incentive in Ireland to better oneself and build up a nest egg for hard times. Much more incentive to simply fall back upon the state - and you could argue they like it exactly that way, fearing the emergence of a mass who have space to think, ask hard questions and say NO more often.

 

[Fortune]

Interesting to see the prevalence of socialist thought - and as always it's diected at the working middle class, who are those hit by 41pc exit tax on an ETF because they don't have the scale to efficiently structure their affairs.

The excuse given in the media is laughable and demonstrates they couldn't even be bothered coming up with something credible.

There is no incentive to save in these products between a 1pc levy on entry (for a life assurance product), 41pc on exit with no relief on losses, and the product charges. All that on capital which has been taxed at roughly 50pc already because that's what you pay on any earnings beyond subsistence levels for a family.

This reflects the overall lack of incentive in Ireland to better oneself and build up a nest egg for hard times. Much more incentive to simply fall back upon the state - and you could argue they like it exactly that way, fearing the emergence of a mass who have space to think, ask hard questions and say NO more often.

The 1 % drives me nuts. They're taking 1% of my money, before anything else happens. At least the 41% is only on growth...

 

[Corola]

Not really, since you can just get 101% allocation to offset the levy.

 

[faketales]

I think its valid to have tax policies that achieves any number of different goals. Encouraging the large number of the population that don't spend every penny they earn every month to invest for their own future rather than gift money to the banks sounds like good policy to me and not one that should be binned because there are poor people.

Something I have always thought about but never been able to fully articulate is that there are people on the same money in the same situations who make different choices. No new cars, fewer holidays but are more risk adverse and want to put money away for a rainy day or into their pension.

Any discussion just seems to band all people of a certain income together and include things like car loans as normal every day expenses of the ordinary man.

 

[Gordon Gekko]

The amount of whinging about this subject never ceases to amaze me. Income for most people with spare cash to invest is taxed at 52% on receipt each year. In a fund, there can be no income and you can just pay 41% on rolled-up income and gains every eight years. That’s worse than 33% CGT on the uplift in value but better than income tax. The tax when a fund is inherited by a spouse is bad, but all in all, it’s not the worst.

 

[Fortune]

Not really, since you can just get 101% allocation to offset the levy.

That's an extra 1% that could've been up for grabs for me. I'm more worried about people who already had allocations less than 100% before the levy.

 

[Fortune]

The amount of whinging about this subject never ceases to amaze me. Income for most people with spare cash to invest is taxed at 52% on receipt each year. In a fund, there can be no income and you can just pay 41% on rolled-up income and gains every eight years. That’s worse than 33% CGT on the uplift in value but better than income tax. The tax when a fund is inherited by a spouse is bad, but all in all, it’s not the worst.

The worst part about it is looking at where the tax started. The rate was set at standard rate of income tax plus 3%. Then they increased that percentage, then they did away with standard rate plus and just set a high rate. Then they brought in deemed disposal. The final insult was when the reduced the DIRT rate but not the edit tax rate, despite them both having the same rate.

 

[GSheehy]

You can set up an investment with a life assurance company on a joint life second death basis so that the death of one spouse doesn't trigger an (additional) exit tax event.

I've said it before, but I'm finding it increasing difficult to not believe that the 1% Goverment Levy and the 41% Life Assurance Exit Tax are taxes on the industry by DoF as the price they have to pay for marginal tax relief on pensions.

Customers are just caught in the crossfire.

The industry (by that I mean product providers) would like to be shot of the levy because they are (mostly) covering the cost of the 1% themselves, now. They're not too vocal on the 41% though, because that's not a cost to them but is a barrier to additional business.

 

[ashambles]

The amount of whinging about this subject never ceases to amaze me. Income for most people with spare cash to invest is taxed at 52% on receipt each year. In a fund, there can be no income and you can just pay 41% on rolled-up income and gains every eight years. That’s worse than 33% CGT on the uplift in value but better than income tax. The tax when a fund is inherited by a spouse is bad, but all in all, it’s not the worst.

They'd be probably be less whinging if was being taxed as income, then it depends on your tax band. That's a fairly nomal way countries tax investment income. Some countries will tax on the lower of income tax or CGT for the individual - it's almost like they put a bit of thought into their taxation.

 

[Gordon Gekko]

They'd be probably be less whinging if was being taxed as income, then it depends on your tax band. That's a fairly nomal way countries tax investment income. Some countries will tax on the lower of income tax or CGT for the individual - it's almost like they put a bit of thought into their taxation.

What about the fact that CGT is higher though?

41% isn’t the worst compromise between 33% and 52%.

Are there lots of people with surplus money to invest outside of pension who pay tax on extra income at 20%?

 

[ashambles]

Are there lots of people with surplus money to invest outside of pension who pay tax on extra income at 20%?

That's one question (and one a DoF official might ask) another one is are there people who've in the past had surplus money to invest outside a pension and now have no work income, or worry they will have no work income at some point in the future?

With income tax the minimum principal you need to build a low but sustainable income is much lower than it is with flat rate tax of 41%.

 

[SPC100]

Interesting to see the prevalence of socialist thought - and as always it's diected at the working middle class, who are those hit by 41pc exit tax on an ETF because they don't have the scale to efficiently structure their affairs.

The excuse given in the media is laughable and demonstrates they couldn't even be bothered coming up with something credible.

There is no incentive to save in these products between a 1pc levy on entry (for a life assurance product), 41pc on exit with no relief on losses, and the product charges. All that on capital which has been taxed at roughly 50pc already because that's what you pay on any earnings beyond subsistence levels for a family.

This reflects the overall lack of incentive in Ireland to better oneself and build up a nest egg for hard times. Much more incentive to simply fall back upon the state - and you could argue they like it exactly that way, fearing the emergence of a mass who have space to think, ask hard questions and say NO more often.

To. make it worse, it actively *encourages* more money to chase property, which is just driving up house prices, and affecting overall competiveness (as the high house prices & rents push up salary demands.)

 

[SPC100]

You can set up an investment with a life assurance company on a joint life second death basis so that the death of one spouse doesn't trigger an (additional) exit tax event.

That's a great point, an amazing insight, and probably worth mentioning more loudly. if there is a key post somewhere on life assurance investment, that point should be on it.

 

[AJAM]

The reason people moan about it, is because it is a stupid tax. Stupidly designed and Stupidly implemented.
The difference in tax take for the Revenue is tiny but the difference for the punter is massive.

If you invest 100K for 20 years (Assuming 0% dividends a year and 7% capital gains - net of all charges) the Revenue collects an extra €2,498 in tax for the 41% Exit Tax fund over the 33% CGT Fund.
But the Investor will end up with €52,399 less.

Is that good tax policy? Is that smart?

If you invest 100K for 20 years (Assuming 0% dividends a year and 7% capital gains - net of all charges)
Fund Balance (after Tax) at 20 years:

1. Exit Tax Fund – €239,870
2. CGT fund – €292,269

Total Tax Paid After 20 years:

1. Exit Tax Fund – €97,198 (at 41% at 3 occasions, year 8, 16 and 20)
2. CGT fund – €94,700 (at 33% once at year 20).

 

[AJAM]

By the way, for the example above
If the Government increased the CGT rate to 33.87% then they would collect the same amount of tax (€97,198) but the investor would still be €49,901 better off.

 

[jpd]

You are forgetting the time value of money - in case of Exit tax the tax is collected in year 8, 16 and 20 whereas in the case of CGT it is collected in year 20. So Revenue have the use of the tax for 12 and 6 years

 

[AJAM]

The government currently can borrow (10 year Bond) at 2.5%
That is the time value of money to them. And for most of the history of exit tax they could borrow at much lower than this.
But for me the time value of money is 7%. So even with the TVM this is still an incredibly stupid way to collect tax.

By the way, I don't agree that time value of money is a reasonable excuse for the way that this tax is set up. We don't tax, land, or gold, or stocks, or bonds, or houses, or art or literally anything else using this spurious time value money argument. So why should it apply only to ETF's?

 

[jpd]

It applies to ETFs because the Life Assurance companies did not want investors investing in ETFs instead of using their (expensive) investment products. So when Revenue decided to bring in deemed disposals for the life insurance investment products, the companies lobbied hard to ensure that ETFs were included in this taxation scheme as well, even though an ETF is just another share.

At the time, Revenue didn't care much for ETFs as they were in their infancy then and not many Irish investors would have had access to them - the arrival of online brokers changed all that so that is much easier for investors to purchase and sell ETFs now than it was 20 or 25 years ago

 

[Zenith63]

By the way, I don't agree that time value of money is a reasonable excuse for the way that this tax is set up. We don't tax, land, or gold, or stocks, or bonds, or houses, or art or literally anything else using this spurious time value money argument. So why should it apply only to ETF's?

Perhaps it should be applied more broadly now it has been successfully tested on ETFs? As things stand, the better off are able to hold these assets until death when the Capital Gain is magically forgiven while the rest of us peasants are selling our assets to fund offspring and retirement, paying CGT along the way.

I think investing in ETFs should be made vastly simpler for the average person, but deemed disposal is not without some merits.

 

[AJAM]

Perhaps it should be applied more broadly now it has been successfully tested on ETFs? As things stand, the better off are able to hold these assets until death when the Capital Gain is magically forgiven while the rest of us peasants are selling our assets to fund offspring and retirement, paying CGT along the way.

Zenith, this is such a stupid argument for me.
If you want to increase the amount of tax you take from the public (or from a specific wealthy cohort) then by all means raise taxes on them. If the problem is that we forgive CGT on death, then simply don't do that.

But to say, well we've already got this poorly designed tax, that literally destroys wealth, while gathering minimal extra revenue, everybody hates it, even revenue, because it's so complex to manage and track, but philosophically I like it, so lets roll it out. That makes no sense!

We can raise more tax revenue.....if we need to, (which to Joe Sod's point above is debatable) using well designed, fairer taxes instead of this stupid ill designed Exit tax.