Key Post Which is better gross roll up or CGT investments?

Brendan Burgess

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From Steven Barrett: https://www.bluewaterfp.ie/investments/which-is-better-gross-roll-up-or-cgt-investments/

Assuming 5% dividends a year and 5% capital gains - net of all charges!

After 8 years:
1. CGT Fund at 28.75% tax: €179,005
2. Deemed disposal €169,789
3. CGT Fund at 52% tax: €150,004

After 20 years:

  1. CGT fund at 28.75% dividend tax – €391,442
  2. Deemed Disposal Fund – €369,494
  3. CGT fund at 52% dividend tax – €319,086
 
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The bigger issue though is that, on death, there is no CGT. A lot of people still own most of their portfolio when they die.

If the person is retired and if they expect to leave it after them, they should be in a CGT Fund.

Brendan
 
How about offshore insurance wrapper products?

As I understand it from those that promote such products the 8 year deemed disposal does not apply (for the right product under the right conditions) and the roll up can continue untaxed until the units are actually sold.
 
This analysis is deeply flawed due to an unrealistic dividend yield relative to capital gain.

It also, as I have previously pointed out doesn’t factor in dividend withholding tax credits.

In any analysis your conclusion is sensitive to your assumptions but by our calculations an average investor in Ireland is better off with general tax principles than with gross roll up

Global Wealth Tax Guide 2022 v1.0

Tax Guide Incorporating Budget 2022 and Revenue E-Brief 164/21 ETFs
joom.ag
 
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The Advantages of a CGT Fund (e.g. an investment trust like SMT) VS a Deemed Disposal Fund (e.g. an ETF like VNRA) really is highlighted when you choose funds with low or no dividends (like the 2 examples).

Assuming 0% dividends a year and 7% capital gains - net of all charges!

After 8 years:

1. Deemed disposal €142,373
2. CGT Fund: €148,118
3. CGT Fund (utilizing annual €1200 TFA): €151,286

After 20 years:
  1. Deemed Disposal Fund – €239,870
  2. CGT fund – €292,269
  3. CGT fund (utilizing annual €1200 TFA) – €300,189
You can see the CGT Fund outperforms the DD fund in all cases but the difference is huge after 20 years for someone who diligently harvests their 1200 euro tax free allowance each year, 300K vs 240k. Almost 60K in the difference. Also this applies to both top and bottom rate tax payers equally.
 
Also worthy of note is that the difference in tax take for the Revenue is nowhere near as large.
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. €86,780 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) the Revenue collects an extra €10,418 in tax for the DD fund, but the punter ends up with €60,319 less! Another reason why DD exit tax is an incredibly stupid tax!

Total Tax Paid After 20 years:
  1. Deemed Disposal Fund – €97,198
  2. CGT fund – €94,700
  3. CGT fund (utilizing annual €1200 TFA) – €86,780

And if the punter is not diligent in collecting the TFA the outcome is even worse! The tax man collect a measly €2,498 extra in tax for the DD fund, but the punter ends up with €52,399 less! SCRAP this stupid tax!
 
I think that they’re UK rules you’re referring to.
 
Is there something to be said for a directly held, widely diversified, portfolio of low/zero dividend shares, harvesting the CGT allowance every year?

Assuming a six figure fund, it should be possible to have a widely diverse portfolio, pay CGT rather than 40% plus the trimmings on drawdowns and - bonus - any legacy will avoid CGT entirely.

(For comparison, the UK allows a generous £12k annual CGT free allowance and £2k free allowance for dividends.)
 
Can i ask - what do we mean by harvesting the cgt allowance? How would that work in practice and is there a simple example that explains it?

I understand that individuals have a personal cgt allowance each year (€1.2k?) where they dont pay tax on gains up to an initial amount. I just dont understand how to go about harvesting or utilising that.

If married can you harvest double the TFA?
 
@jim
This means that you would sell a portion of your holdings annually such that you realize at least EUR1,200 in capital gains and you are exempt from paying CGT on the first 1,200 then buy back in to the market. Rinse and repeat next year.

The opposite of that is either 1) not making any capital gains or 2) making capital gains but not "harvesting" it via your tax return.

Hope that helps?
 
Exactly. It’s a lot more meaningful in the UK where there’s circa £10k to play around with, but as the saying goes, every little helps.
 
Ok I follow you in theory...

At the risk of sounding stupid...

If iv got €10k invested and after 12 months its worth €11.2k. So i sell €1.2k and pay no tax on it.

Then i reinvest that €1.2k bringing my fund back up to €11.2k? Wheres the advantage?
 
If you €1.2K, your gain is 0.2K - to use the whole of your CGT allowance, you have to sell the whole lot
 
The advantage is that you zero out that capital gain & so it is not carried forward & as such it is not subject to tax in future.

1] So €10k invested and after 12 months its worth €11.2k & you don't harvest the CGT allowance of EUR1,200.
The following year your €11.2k grows to say 12k & again you do not harvest.
Year 3 your 12k grows to say 14k & you decide to cash out.
You will have to pay capital gains tax on your total pot minus your initial investment: 14,000 - 10,000 = 4,500

2] On the other hand if you had harvested every year you would have a significantly lower capital gains & by extension a significantly lower capital gain tax burden as follows:

Year 0: Invest 10k
Year 1: growth of 1.2k harvested via tax return. Capital gains effectively zero'd out.
Year 2: growth of 0.8k harvested via tax return. Capital gains effectively zero'd out.
Year 3: growth of 2.0k. 1.2k harvested via tax return. Capital gains effectively reduced to 2,000-1,200=800.

Cash out & pay capital gains tax: Your capital gain is Eur800. So you only pay CGT on Eur800 instead of on Eur4,500.

Let's say the relevant rate of CGT is 33% that comes out as Eur264 vs. Eur1,485

hope this helps.
 
Thanks @Horatio this really does clarifies it for me.
 

Just on your numbers, the gain is actually 4k less the 1200, 2800. Don't forget you can reduce your 4,000 by the 1,200 allowance in the year that you sell, reducing the tax liability you have described. You have also omitted the limitation of the four week-rule?
 
jim said:
.....

If married can you harvest double the TFA?
Click to expand...
Yes. Each person gets an individual CGT exemption of €1270 but they obviously need assets in their own name to avail of it. The €1270 allowance is not transferable between spouses. I think that each person can avail of the allowance for assets that are jointly held, but that needs further checking.
 
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