Minister Michael McGrath initiated a review of the fund and investment industry in Ireland. Due to the penal investment market in Ireland, whenever we hear of a review, we get our hopes up and let our imagination run wild, only to be disappointed.
We were hoping for the results of the review to be part of Budget 2025 and be part of the Finance Bill but there were indications beforehand that this would not be the case. But last week the Department of Finance issued Funds Sector 2030. This is a detailed report on the funds sector in Ireland, but the bit we are interested in is the retail investment part (page 63). Minister Chambers welcomed the report but said that any changes would be for the next Minister for Finance (a classic bit of electioneering!).
Of the 500+ blogs I have written, the most read articles are the ones on deemed disposal. They are also the ones that I get the most contact from readers on, most just venting on the injustice of it all. I do see the Revenue’s point in that they don’t receive a regular income due to gross roll up, but there has to be a better way than making people pay tax every 8 years. There are distributing funds, which can be taxed annually and excluded from deemed disposal but the Revenue have chosen to apply it to all funds.
The review has recommended that deemed disposal is done away with altogether. This is great news for many, especially those who invested through life companies who deduct the tax straight out of the fund and pay it to the Revenue. Those who invest through platforms have the option of paying the tax out of their own cash balances. But for those paying the tax through ROS, it is unnecessarily complicated and my experience is that not many people in the Revenue fully understand the current taxation rules of funds that are invested outside of life assurance companies (and I get the impression that they are reliant on the life companies to do the calculations and deductions for them accurately).
Any contribution to an investment plan with a life assurance company is subject to a 1% tax. This is a significant drag on your returns if €1 out of every €100 invested is deducted in tax at the outset. For higher premiums, the life company would pay a 1% additional allocation on your money, which covered most of the tax. Don’t believe anyone say the 1% bonus allocation cancels out the tax, it doesn’t. €100 contributed, 1% tax leaves you with €99, which gets 101% allocation, so €99.99 invested. 😉
The report recommended that this tax is removed. With less need for life companies to give that additional 1% allocation, some contracts may see the annual management charge reduce i.e. the 1% isn’t free, you pay for it. Fund platforms don’t pay this tax, so there will be no change there.
Protection products also pay this 1% levy but there was no mention on whether it will be removed from them.
The tax on the gains of funds and ETFs is 41% under what is called exit tax. This is way out of kilter with the rest of Europe. Exit tax used to be DIRT plus 2%. It was never the law, just a rule of thumb. DIRT went up to 39% after the financial crash but gradually came back down to 33%. Exit tax never changed. The government didn’t want to appear to be giving tax breaks to the rich; after all only the wealthy invested ( how out of touch were they!).
The penal tax rate has driven people to investing in riskier investments like single stocks or investment trusts (which are usually very concentrated) or to just leave the money on deposit. All the while, more diversified funds like the Global Stock Index or S&P 500 remained taxed at 41%.
The report recommends that funds and ETFs are now taxed under CGT at 33%.
If you invest in assets taxed under CGT, you can offset losses against future gains. This is not allowed with funds.
This is a real situation. Client invests €500,000 in the S&P 500. It does great and increases to €900,000. As it is going so well, they invest another €500,000. There is market volatility and the first investment falls to €700,000 and the second investment is €300,000, so €1 million in total, equal to the amount they invested. They get nervous and take their money out.
Tranche one is showing a gain of €200,000 and has a tax bill of €82,000. Tranche 2 is showing a loss that can’t be offset against the gain. So although they are only getting their money back, they have a tax bill of €82,000. This is not right.
The report says no more than a limited form of loss relief, so it will be interesting to see what it is.
This is a long overdue reform of the tax system of investments in Ireland. Let’s hope that it happens soon after the introduction of the new government and it is not something that takes years to implement.
Steven Barrett
28 October 2024