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

[Duke of Marmalade]

Well it would not be tax free but what exactly is the problem with wealthy people accumulating wealth? I really don't see the moral objection? Tax should not be about implementing social engineering to change society. Extremely presumptive that everyone shares your lefty views.

What is more, they can already do this if you are a business owner, a farmer or own dividend free stocks.

As a peer of the realm I can assure you that I am no rabid socialist. I am pointing out the position of the body politic and that anyone lobbying for "tax free" accumulator ETFs is wasting their time and in fact discrediting any valid points they may be making. Similarly, as a duke I would welcome the abolition of CAT but that is obviously a total political non runner.
Let me recall a very telling incident around the time of the introduction of gross roll up for life assurance in 2001. Originally, it had no deemed disposal. Within days a leading stockbroker circulated its wealthy clients with a brochure headlined "Put a Life Belt around your assets". The crude theme was that they should put all their assets in a life policy and avoid all investment taxes in their lifetime. Charlie McCreevey, no Che Guevara, was absolutely hopping mad. He issued a decree that steps would be taken in the next budget, backdated to the date of the announcement, that would eliminate this facility. The future arrival of Deemed Disposal had been announced and the rest is history.

 

[Steven Barrett]

Example:
Assuming initial 100K invested, 0% dividends a year and 7% annual returns - net of all charges.

After 8 years:
Deemed Disposal Fund – €142,373
CGT fund – €148,118

After 20 years:
Deemed Disposal Fund – €239,870
CGT fund – €292,269

You can see the CGT Fund outperforms the DD fund in all cases but the difference is huge after 20 years, almost 60K in the difference.

Compare this to the difference in tax take for the Revenue.
The DD fund over 20 years will pay a total of €97,198 in tax (at 41% at 3 occasions, year 8, 16 and 20).
The CGT fund will pay approx. €94,700 in tax (at 33% once at year 20).
So in my example (Assuming 0% dividends a year and 7% capital gains - net of all charges) Revenue collects €2,498 extra in tax for the DD fund, but the investor ends up with €52,399 less

Unless using a life assurance product, you don't have to pay the deemed disposal tax through your fund, so it can still accumulate without having money taken out to pay tax.

I've been writing a blog for 10 years and the most read one is the one on Deemed Disposal. And while people rile against, they never offer alternatives. As @Duke of Marmalade pointed out, you can't simply have funds accumulating in value forever and the Revenue receiving nothing. So you either have accumulating funds and deemed disposal or income paying funds, which are taxed each year.

The Revenue are definitely complicit in this mess. Income paying funds are liable to tax under PAYE and then the gains are subject to 41% exit tax and deemed disposal. they shouldn't have allowed this.

I do find that some are throwing the baby out with the bathwater on this issue too. Not investing at all because deemed disposal is unfair. Alright, good luck with that. Or investing in individual shares or more expensive and riskier investment trusts.

While I don't like paying 41% tax, I also don't like paying 52% tax on my income either.


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

 

[fistophobia]

The problem is one of perception - theres a definite left-wing bias in Ireland.
I dont think pandering to what a minority of investors want, is going to be popular right now.
I would say most people dont know what an ETF is, and I have seen it mentioned several times on this website as an EFT.

 

[basilbrush]

Is there any possibility that accumulating funds that wish to let their Irish investors avoid deemed disposal could report the necessary information, such as the income on the investor's holding that was reinvested during the year, so the income could be taxed like regular income and so solve the problem of untaxed gains accumulating?

Also: Can anyone give an example of how accumulating funds are taxed in another country (when not done through something like a UK ISA)? Are there differences in the way our tax system is designed that would make such a system not work here?

 

[Babhdan]

Unless using a life assurance product, you don't have to pay the deemed disposal tax through your fund, so it can still accumulate without having money taken out to pay tax.

I've been writing a blog for 10 years and the most read one is the one on Deemed Disposal. And while people rile against, they never offer alternatives. As @Duke of Marmalade pointed out, you can't simply have funds accumulating in value forever and the Revenue receiving nothing. So you either have accumulating funds and deemed disposal or income paying funds, which are taxed each year.

The Revenue are definitely complicit in this mess. Income paying funds are liable to tax under PAYE and then the gains are subject to 41% exit tax and deemed disposal. they shouldn't have allowed this.

I do find that some are throwing the baby out with the bathwater on this issue too. Not investing at all because deemed disposal is unfair. Alright, good luck with that. Or investing in individual shares or more expensive and riskier investment trusts.

While I don't like paying 41% tax, I also don't like paying 52% tax on my income either.


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

As a simple middle ground solution. Just drop deemed disposal on distributing ETFs. I understand your sentiment about 41% being less than 52% income tax but income is actually taxed far far less because income tax is progressive. From my calculations, youd want to be at least 150,000 to be paying 41% on income. Why cant a person living off ETFs get treat their ETF distributions or sales as income for tax purposes?

 

[Horatio]

Also: Can anyone give an example of how accumulating funds are taxed in another country (when not done through something like a UK ISA)? Are there differences in the way our tax system is designed that would make such a system not work here?

For reference many countries in Europe do not charge CGT at all.
Take a look at this map. The lightest shade of pink is 0% CGT.

If your potential tax bill on gains warrants it & you're in a position to become tax resident overseas it is a real option to move.

2022 Capital Gains Tax Rates in Europe

In many countries, investment income, such as dividends and capital gains, is taxed at a different rate than wage income. Denmark levies the highest top capital gains tax among European OECD countries, followed by Norway, Finland, and France.

taxfoundation.org

 

[Duke of Marmalade]

For reference many countries in Europe do not charge CGT at all.
Take a look at this map. The lightest shade of pink is 0% CGT.

If your potential tax bill on gains warrants it & you're in a position to become tax resident overseas it is a real option to move.

2022 Capital Gains Tax Rates in Europe

In many countries, investment income, such as dividends and capital gains, is taxed at a different rate than wage income. Denmark levies the highest top capital gains tax among European OECD countries, followed by Norway, Finland, and France.

taxfoundation.org

Very interesting. And CGT is relatively new in Ireland/UK, commencing in the 1970s whereas income tax is over 200 years old.

 

[Horatio]

On the flip side Ireland does not have a wealth tax (yet).

I know property tax is akin to a wealth tax but thats not what I'm writing about here.

 

[Nermal]

Unless using a life assurance product, you don't have to pay the deemed disposal tax through your fund, so it can still accumulate without having money taken out to pay tax.

I've been writing a blog for 10 years and the most read one is the one on Deemed Disposal. And while people rile against, they never offer alternatives. As @Duke of Marmalade pointed out, you can't simply have funds accumulating in value forever and the Revenue receiving nothing. So you either have accumulating funds and deemed disposal or income paying funds, which are taxed each year.

The Revenue are definitely complicit in this mess. Income paying funds are liable to tax under PAYE and then the gains are subject to 41% exit tax and deemed disposal. they shouldn't have allowed this.

I do find that some are throwing the baby out with the bathwater on this issue too. Not investing at all because deemed disposal is unfair. Alright, good luck with that. Or investing in individual shares or more expensive and riskier investment trusts.

While I don't like paying 41% tax, I also don't like paying 52% tax on my income either.


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

But the funds do not accumulate 'forever'. Revenue receive either CGT when sold, or CAT when inherited. Why isn't that enough?

 

[Nermal]

On the flip side Ireland does not have a wealth tax (yet).

I know property tax is akin to a wealth tax but thats not what I'm writing about here.

Indexation on CGT ended in 2003.

Since then, a hypothetical €100 investment that merely matched official inflation rates would be worth €162.37.

The €62.37 would be liable for €20.58 in CGT.

A stealth 'wealth tax' of around 0.6% per annum.

 

[Duke of Marmalade]

Revenue receive either CGT when sold, or CAT when inherited. Why isn't that enough?

Coz it's not.

 

[joe sod]

Coz it's not.

A bit like Putin and Ukraine, its personal, Crimea wasn't enough, those pesky ETF investors have been living it up and then they started acquiring those damn US ETFs , the Kremlin had enough and pulled out of the earlier agreement regarding those ETFs. Revenue have laid mines and will blow up those ETFs if they try and leave Odessa now

 

[Duke of Marmalade]

@Nermal asked what's wrong with ETFs being tax free till death. Coz every other form of investment would then be very irrational. If s/he is asking why can't all investments be tax free till death, well I have no logical argument though it would be a rather fundamental change and hardly the basis for a submission to the consultation.

 

[Nermal]

@Nermal asked what's wrong with ETFs being tax free till death. Coz every other form of investment would then be very irrational. If s/he is asking why can't all investments be tax free till death, well I have no logical argument though it would be a rather fundamental change and hardly the basis for a submission to the consultation.

For most people, under a normal tax regime, investments other than ETFs are indeed irrational.

But explain to us - what's logical about BRKB being tax free until death, when an ETF is not?

 

[basilbrush]

(I made some points about the difficulty of treating ETFs like normal shares because ETFs are not taxed on internal gains/income the same way that normal companies are, but I don't know enough about it to be sure that what I said is valid, so I'm deleting it to avoid possibly being misleading.)

 

[Zenith63]

For reference many countries in Europe do not charge CGT at all.
Take a look at this map. The lightest shade of pink is 0% CGT.

If your potential tax bill on gains warrants it & you're in a position to become tax resident overseas it is a real option to move.

2022 Capital Gains Tax Rates in Europe

In many countries, investment income, such as dividends and capital gains, is taxed at a different rate than wage income. Denmark levies the highest top capital gains tax among European OECD countries, followed by Norway, Finland, and France.

taxfoundation.org

Switzerland appears to be the only country there that charges no CGT at all? All the rest are 0% under certain conditions - for instance in Slovenia if you hold the asset for 20 years, which is a fair distance from no CGT.

The report tells me that our CGT rate is fairly close to what most European citizens pay. Unless you have very significant money to invest, the cost of moving to and regularly returning home to visit family/friends from one of the lower-rate countries would cancel out any tax saved.

 

[AJAM]

Question: I presume this is simply due to the timing, as in the 41% exit tax at year 8 causes a big interruption to the effects of compounding?

In this example, yes it is due the the interruption to compounding effects. The reality is likely even worse than this as ETF's generally have lower fees and passive index ETF's generally outperform actively managed funds

 

[AJAM]

The report tells me that our CGT rate is fairly close to what most European citizens pay.

It clearly states in the report.
"On average, the European countries covered tax capital gains arising from the sale of listed shares at 19.4 percent."

Not sure how you think that is close to 33% (or 41% for ETF's).

 

[AJAM]

Of course it is. @AJAM made this point before and I pointed out its irrelevance. The time value of money in the example is 7% p.a. or put another way if the Revenue were to invest its deemed disposal tax (collected at years 8 and 16) in said ETF it would earn 7% p.a. and that would eliminate the apparent anomaly.

Irrelevance??? Do you really believe that the punter ending up with 52K less at the end of the investment period is irrelevant??
Prove it! Send me 52K now!

What Nonsensical Sh*te! Even if revenue did reap the 7% "time value of money" over the period (which I guarantee you they do not because they do not invest it), how does someone else having 52K "eliminate the apparent anomaly" that you have 52K less?

Please explain it to me, and then send me 52K, I will endeavor to follow your instructions and eliminate the apparent anomaly.

 

[Duke of Marmalade]

Irrelevance??? Do you really believe that the punter ending up with 52K less at the end of the investment period is irrelevant??
Prove it! Send me 52K now!

What Nonsensical Sh*te! Even if revenue did reap the 7% "time value of money" over the period (which I guarantee you they do not because they do not invest it), how does someone else having 52K "eliminate the apparent anomaly" that you have 52K less?

Please explain it to me, and then send me 52K, I will endeavor to follow your instructions and eliminate the apparent anomaly.

I shouldn't engage with such an intemperate rant but if you don't like me, read @Steven Barrett. If the punter pays his ETF DD tax but leaves his ETF intact he will get that €52k. If he makes the investment decision to encash the ETF to pay for the tax well that is an investment decision which on your assumptions is not very clever. He has actually turned the deemed disposal into a part actual disposal. Do you want me to draw diagrams.