Key Post Understanding Deemed Disposal on Life Insurance products

Brendan Burgess

Brendan Burgess

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This has been discussed in many different threads with many diversions and confusions. I want to clarify the rules here.

It is about Life Insurance investment products. The calculations will be done for you but you need to know the calculations to understand the strategy around them.

This thread is not about ETFs or UCITs. Feel free to start a new thread on ETFs or UCITs.

This thread is not about the stupidity of the rules or what changes are expected. Again, feel free to discuss these in other threads.

My understanding is based on the Duke's clear explanation in the middle of this thread

Key Post - Strategy around the 8 year deemed disposal

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 -...
www.askaboutmoney.com

The key to understanding it is that any Deemed Disposal tax paid after 8 years is paid on account and will be deducted from the final liability.

Can anyone link me to the Revenue's rules on this?
 
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Deemed disposal at a profit

Note: Updated in light of subsequent posts correcting my initial example

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Frequently Asked Questions

Q: I am unhappy with the Irish Life product I have as it's made a loss and the charges are too high. I want to switch to New Ireland. Can I set the loss on the Irish Life product against future gains in the New Ireland product?
A: No

Q: If I make a loss on a product, can I carry it forward against gains on other products?
A: No

Q: If I switch within a fund e.g. from equities to cash, is that a disposal?
A: No, assuming it stays within the same product which allows you to switch.

Q: Do I have to pay Exit Tax on my death?
A: Yes. The Life company will deduct it and pay the net amount to your estate.
 
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Slightly off topic but can anyone explain to me why these investment vehicles are called “Life Insurance” products? I have one with Zurich which is doing well, but it is an investment, not life insurance.

Thanks

g
 
Brendan Burgess said:
The key to understanding it is that any Deemed Disposal tax paid after 8 years is paid on account and will be deducted from the final liability.

Can anyone link me to the Revenue's rules on this?
Click to expand...
It's worth noting that the "adding back the tax" method in this thread is only correct if the tax rate stays the same. It is wrong if the tax rate changes. The correct method is to follow the Revenue example and use the number of units and their unit price.

Appendix I(b) gives the worked example with deemed/actual disposals, including forced redemptions to pay the tax.

Part 27 - Sections 731-747F

www.revenue.ie www.revenue.ie

Appendix now attached to this post
 

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  • Extract from the Tax and Duty Manual.pdf
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Thanks Corola

I have to strike a balance between having examples which people can understand and plan accordingly and having very complex examples where the principles are lost.

I have attached the Extract from the Manual to your post and people who wish to go into this level of detail can study it there.

Brendan
 
Corola said:
It's worth noting that the "adding back the tax" method in this thread is only correct if the tax rate stays the same. It is wrong if the tax rate changes. The correct method is to follow the Revenue example and use the number of units and their unit price.

Appendix I(b) gives the worked example with deemed/actual disposals, including forced redemptions to pay the tax.

Part 27 - Sections 731-747F

www.revenue.ie www.revenue.ie

Appendix now attached to this post
Click to expand...
Appendix I(b) only applies when using average costs, which life companies don't do.
 
Cost basis isn't relevant to this thread, it is a lump sum investment. There is only one initial price.
 
No, the comment about average cost basis is not relevant. The example is still showing how to calculate deemed disposal and exit tax.
 
I have been studying this interesting example and this is my read.
For a Life Policy the one and only taxable entity is that policy. Units are mere internal book-keeping. So when a LC pays DD tax it will reduce the value of the LP by cancelling units but note that crucially it does not reduce the Acquisition Cost of the LP. On eventual encashment the policy is worth what it is worth albeit calculated by reference to these notional units. The acquisition cost of the LP has not changed but its final encashment value has been reduced by the DD tax deducted This needs to be added back to the Exit Tax calculation to calculate overall profit on the policy which would now be subject to Exit Tax at the going rate with a deduction for DD tax already paid.

In the case of UCITs etc. the taxable entities are the units themselves. The UCITS will enforce actual encashment of some units to pay DD tax and indeed this encashment will incur its own actual Exit Tax. When the remaining units are eventually encashed the taxable profit will be calculated without the necessity to add back previous tax deducted and as with the LP any such DD deducted can be set against this final tax. The main difference, so far as I can see, is that with the LP the initial acquisition cost is unaffected whereas with the UCITS it has been reduced by the earlier enforced encashment of units.

So I agree that the average cost basis does not seem to be relevant.
 
Folks

REad the first post.

This is not about UCITS or ETFs. It is about life policies.

It seems to me that my examples, which were after correction by others, are correct for life policies.

If they are different for something else, it's ok to note that but not to take the thread off topic.

So are my examples correct for life policies?
Are they correct for changing exit tax rates?

Brendan
 
Brendan Burgess said:
Folks

REad the first post.

This is not about UCITS or ETFs. It is about life policies.

It seems to me that my examples, which were after correction by others, are correct for life policies.

If they are different for something else, it's ok to note that but not to take the thread off topic.

So are my examples correct for life policies?
Are they correct for changing exit tax rates?

Brendan
Click to expand...
Yes they are. I would have liked to address @Corola's last post but I accept the TOR as set out in OP.
 
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