Key Post Strategy around the 8 year deemed disposal

[jpd]

I sold one of my ETFs in January 2023. This was the first disposal for many years. I am thinking of disposing of them all and just buying a selection of shares.
But for S&P 500 or NASDAQ this is quite messy

I have asked Revenue how I should account for this in my Form 11 return next year - still waiting for a reply
I don't think they have many people who understand how this works

 

[ClubMan]

Are there any strategic points around this to look out for?

If I am coming up to the 8 years, should I exit it myself and reinvest? I presume not as I would face the 1% stamp duty on reinvesting and lose any potential refund from a subsequent fall.

If I am coming up to the 8 years and planning on cashing it anyway to use the money for something else, is there any advantage in exiting it early?

Just wondering if anybody, especially finance professionals, have any feedback on this?

I have some unit linked funds coming up to, or just past, their latest 8 year deemed disposal anniversary. I'm thinking of cashing in and investing directly in ETFs or shares instead in order to reduce charges drag (and avail of CGT treatment if I go with shares). Should the deemed disposal timing have any bearing on when I cash in or not? Thanks.

 

[joe sod]

I sold one of my ETFs in January 2023. This was the first disposal for many years. I am thinking of disposing of them all and just buying a selection of shares.
But for S&P 500 or NASDAQ this is quite messy

I have asked Revenue how I should account for this in my Form 11 return next year - still waiting for a reply
I don't think they have many people who understand how this works

All the more reason for them to simplify the whole regime when their own staff don't even understand it

 

[Ent319]

You’re better off having multiple investments staggered over time than investing in just one with deemed disposal.

Say you have one lump sum investment. All growth on this will be taxed after eight years.

Say you have a regular saver investment. All growth on this will also be taxed after eight years.

But if you have multiple investment products each will only be taxed eight years after it is first created. The result of this is that your money will spend more time in the market untaxed, thus compounding better.

 

[nest egg]

You’re better off having multiple investments staggered over time than investing in just one with deemed disposal.

Say you have one lump sum investment. All growth on this will be taxed after eight years.

Say you have a regular saver investment. All growth on this will also be taxed after eight years.

But if you have multiple investment products each will only be taxed eight years after it is first created. The result of this is that your money will spend more time in the market untaxed, thus compounding better.

In a situation whereby I invest monthly / regular saver, then I would have thought after 8 years, I would be paying DD on a monthly basis in line with each invested amount, but perhaps I've misunderstood based on what you've said above?

 

[Ent319]

In a situation whereby I invest monthly / regular saver, then I would have thought after 8 years, I would be paying DD on a monthly basis in line with each invested amount, but perhaps I've misunderstood based on what you've said above?

Oh yes sorry - I meant this only for life products subject to deemed disposal.

 

[ClubMan]

So, nobody can answer the original question?

 

[Duke of Marmalade]

The actual tax due is calculated at final disposal. It is the encashment value less premiums paid and is zeroised if negative. Note any tax paid on DD is added back in this calculation.
Taxes paid at deemed disposal are just down payments.
If the amount paid on deemed disposal(s) exceeds the amount due on final disposal it is refunded but not exceeding the final amount due.
Example: tax on DD €10k. Final position a loss of, say, 5k. Final tax calculation 0; refund €10k.
Note that the actual tax rate that matters is the one at final disposal. Example:
Gain at DD €10,000; Exit Tax rate 41%; down payment €4.1k. Gain on final disposal €15k; ET rate 33%. ET due €5k less €4.1k refund.
Hence if you believe ET rate has more chance of falling in future than rising (which I do) you should let the DD take place and not encash and reinvest but of course vice versa if you think the rate will go up.

@Corola's calculation works if the Exit Tax rate stays the same but is incorrect if it changes, thus:
Case 1
Year 10: €143,600 = 883 units at €162.65 each
Gain = 883 * (162.65-100) = €55,314
Assume Exit Tax rate falls to 30%.
Tax = €55,314 * 30% = €16,594
Credit tax already paid in year 8 = (883/1,000) * €16,400 = €14,479
Amount to pay = €16,594 - €14,479 = €2,115

Correct calculation:
Final taxable gain: €143,600 + €16,400 - €100,000 = €60,000
Tax = €60,000 * 30% = €18,000
Credit for down payment of tax in year 8 €16,400
Amount to pay = €18,000 - €16,400 = €1,600

@Corola is assuming that Deemed Disposal is a "reset" whereas it is merely a down payment on the final tax due.

At least that is my understanding but I stand to be ejected.

 

[ClubMan]

Thanks @Duke of Marmalade .

There is some confusion here as exemplified by the examples posted by @Corola.
The actual tax due is calculated at final disposal. It is the encashment value less premiums paid and is zeroised if negative. Note any tax paid on DD does not enter this calculation.
Taxes paid at deemed disposal are just down payments.

But the tax is actually deducted at that point I presume?
And for an ETF holder where the tax due is greater than zero, they have to either find spare cash to pay the bill or sell units of the investment to pay it I presume?

Hence if you believe ET rate has more chance of falling in future than rising (which I do) you should let the DD take place and not encash and reinvest but of course vice versa if you think the rate will go up.

That's useful. Thanks.

 

[Duke of Marmalade]

Thanks @Duke of Marmalade .

But the tax is actually deducted at that point I presume?
And for an ETF holder where the tax due is greater than zero, they have to either find spare cash to pay the bill or sell units of the investment to pay it I presume?

Yes on both counts. It is a down payment just like preliminary tax for the self employed.
I have made a significant correction to the earlier post. The following example should make it a bit clearer.
Original investment 10k in life insurance policy
Value after 8 years 20k
Deemed disposal down payment taken from fund 4.1k; value remaining 15.9k
3 years later encash for 20k
Taxable amount: 20k (encashment value) + 4.1k (DD down payment) - 10k (initial premium) = 14.1k.
Tax incurred 14.1k x 41% = 5.8k less 4.1k down payment gives 1.7k tax due.

 

[Duke of Marmalade]

You’re better off having multiple investments staggered over time than investing in just one with deemed disposal.

Say you have one lump sum investment. All growth on this will be taxed after eight years.

Say you have a regular saver investment. All growth on this will also be taxed after eight years.

But if you have multiple investment products each will only be taxed eight years after it is first created. The result of this is that your money will spend more time in the market untaxed, thus compounding better.

That is correct. I am surprised that no life company has designed their regular savings policies to be technically a series of new policies like used to happen in the UK (for some reason that I forget).
I suppose that would have made deemed disposal a right pain in the mainframe for regular premium policies; still it would have been a USP.

 

[Corola]

@Corola is assuming that Deemed Disposal is a "reset" whereas it is merely a down payment on the final tax due.

The difference is when units are sold to pay the tax, it's not a "deemed" disposal anymore, it's a real disposal which is taxable at 41%. It's equivalent to selling the whole fund, paying the tax on that, and rebuying units with your remaining money. The units disposed are gone, so they don't come back in to the calculation at the subsequent disposal at 30%.

Not a reset, because you still account for the original cost of the remaining units, but you don't ignore the real disposal.

 

[Duke of Marmalade]

Agreed, I was referring to the life assurance situation. The whole thing was contrived for life assurance but you are right on ETFs where there is nothing deemed about the disposal at all.

 

[Cantillon]

This thread caught my attention as I am considering moving managed funds to save on the AMC, but I'm guessing the movement will trigger maturity / encashment, and so will trigger exit tax.

Policy started 2007, AMC is 1%, with Zurich
Deemed disposal in May 2015: 20k tax paid
Deemed disposal due again in May 2023, I presume?

If I switch brokers, the AMC falls to 0.65%, saving 500-600 per year.
It would be Zurich with the the new broker.

I presume the switch would require a new policy, and so exit tax would be paid on previous policy.

This thread has got me thinking that maybe there's a better strategy with the exit tax?

 

[ClubMan]

Agreed, I was referring to the life assurance situation. The whole thing was contrived for life assurance but you are right on ETFs where there is nothing deemed about the disposal at all.

There is if you pay the tax using other money and leave the ETF investment intact?

 

[ClubMan]

but I'm guessing the movement will trigger maturity / encashment, and so will trigger exit tax.

Correct.

Policy started 2007, AMC is 1%, with Zurich
Deemed disposal in May 2015: 20k tax paid
Deemed disposal due again in May 2023, I presume?

Correct.

I presume the switch would require a new policy, and so exit tax would be paid on previous policy.

Correct (same question as your first).

This thread has got me thinking that maybe there's a better strategy with the exit tax?

Like what? I can't see that it makes any difference if you're already on the verge of an 8 year anniversary anyway? Maybe if such an anniversary was further away then the timing of an encashment and reinvestment might be relevant?

 

[Duke of Marmalade]

There is if you pay the tax using other money and leave the ETF investment intact?

True. And @Corola's examples only had a part sale of the ETF to pay the tax so it still includes a large element of "deemed" disposal.

 

[Duke of Marmalade]

If I switch brokers, the AMC falls to 0.65%, saving 500-600 per year.
It would be Zurich with the the new broker.

I presume the switch would require a new policy, and so exit tax would be paid on previous policy.

You're probably right but if it is the same policy type with just a change of AMC then there is no earthly reason why a new policy is needed. In my day changing brokers was routine and it never involved encashing the policy. Check with Zurich whether you can merely switch broker without encashing the policy and of course that you would enjoy the 65bps.
If that is possible then in my view deemed disposal is better than encashment and re-entry as you will get the benefit of any future reduction in Exit Tax rate (or vice versa, of course). And you already have 20k at stake. If say the Exit Tax rate falls from 41% to the DIRT rate of 33% you would get a c. 4k rebate.

 

[messyleo]

You're probably right but if it is the same policy type with just a change of AMC then there is no earthly reason why a new policy is needed. In my day changing brokers was routine and it never involved encashing the policy. Check with Zurich whether you can merely switch broker without encashing the policy and of course that you would enjoy the 65bps.
If that is possible then in my view deemed disposal is better than encashment and re-entry as you will get the benefit of any future reduction in Exit Tax rate (or vice versa, of course). And you already have 20k at stake. If say the Exit Tax rate falls from 41% to the DIRT rate of 33% you would get a c. 4k rebate.

I asked zurich exactly this and they said it needs a whole new policy! I agree with your argument needless to say.

 

[GSheehy]

To the best of my knowledge, the only time that it makes sense to cancel one unit-linked investment to avail of a lower priced product is when it's between year 5 and year 8 and it's at breakeven. Okay, you could argue that the cost of the exit charges are worth the hit but there's no way I'd write a 'Reasons Why' letter for a client advising them that it's a good idea to switch if there was a gain or loss on the original value.

You can transfer/switch from one intermediary to another without cashing in an investment but if you want to change the structure of the pricing then it's a 'new' investment and you trigger a deemed disposal. I can't remember when it was any different, but maybe it was in the pre 1% Government Levy / new Exit Tax regime.

Now, if you could change/switch the pricing structure and if Revenue allowed you to carry over the +/- on your Exit Tax, then that might work (?). In the 2007 example above, they'd also collect a 1% Government Levy that they didn't on the original investment.

Gerard

www.bond.ie