Calculating Deemed Disposal on a long term investment

Deemed disposal is a pain for many investors. Having to pay tax on an investment that they have not cashed in. The issue is the whole “gross roll up” system where dividends and profits are reinvested tax free with no income to the Revenue. If the Irish Revenue allowed some alternatives where investors paid their tax on an annual basis, the problem would be solved. But for the moment, it is here and we have to deal with it.

For long term investors who are subject to deemed disposal, the first payment is easy enough to calculate. But how do you calculate the tax due on the second and subsequent disposals?

We will use an example of €100,000 invested for a period of 20 years and show you how to calculate the tax payable.

Step 1 – 8 year deemed disposal

  • Our €100,000 is now worth €200,000
  • Our profit is the current value less the investment amount, so that is €100,000
  • The exit tax at 41%, means the deemed disposal at year 8 is €41,000

Step 2 – 16 year deemed disposal

  • Our fund has grown to €300,000
  • In calculating the second deemed disposal, we use the assumption that the first one didn’t occur, so we have to add the €41,000 back to the fund value.
  • We add €300,000 with €41,000 less the investment amount, which gives us a taxable amount of €241,000
  • This means there is a tax liability of €98,810
  • We have already paid over €41,000 in tax so we can deduct this from the tax due.
  • Our tax liability at year 16 is €98,810 – €41,000 = €57,810

Step 3 – 20 year actual disposal

  • Our fund has grown to €400,000 in value and we have decided to cash it in.
  • Again, in calculating the tax due, we assume that the deemed disposals did not happen, so we add €98,810 to the value of the fund.
  • The amount subject to taxation is €400,000 + €98,810 – €100,000 = €398,810
  • The tax due on that amount is €163,512
  • We have however, already paid €98,810 in tax already which can be offset against our final tax bill
  • The final tax bill is €64,702

There are a few important points to remember regarding deemed disposal:

  1. If you invest through a life company, they will calculate and pay the deemed disposal from your fund automatically. You do not have to do anything or include it in your tax return.
  2. If you invest through a fund platform or stockbroker, you have to pay your deemed disposal by the following year in which it was due, the same as your income tax will be due.
  3. In this situation, you do not have to pay the deemed disposal from the fund. You can pay it from cash holdings that you may have.
  4. If when you make the final actual disposal, the value of the fund is lower than the deemed disposal valuation used, you claim a refund from the Revenue on the overpayment of tax.