Deemed disposal or real disposal?

A question arose recently about deemed disposal. Would it actually be better to pay the tax every 8 years and start anew than be subject the the deemed disposal? There are a number of factors that show the deemed disposal is better than real disposal every 8 years and immediately reinvesting.

Tax and Returns

There is no difference in the end value between if you actually paid the tax every 8 years or if you paid the deemed disposal. While the method of calculating deemed disposal over more than one period is not that straight forward, investors are not any better or worse off than someone who makes an actual disposal.

Time out of the market

If using a life company or fund platform, you will experience time out of the market while the trade is placed to redeem a position and then reinvest your money back into the market. If using a life company, merely moving it to cash won’t trigger the tax liability, you have to encash the policy and start a new one. This takes time and you can easily be looking at a month out of the market from the time you send instruction to cash in your policy and the new one is invested.

Execution only platforms are a lot quicker and do not involve having to cash in the whole investment. You just have to sell out of the fund to trigger the tax liability. But even still, it takes a few days for the trade to settle.

Fall in value

Deemed disposal is exactly that, deemed. It is not a real disposal. You pay your deemed tax every 8 years. When it comes to cashing in your investment, the real tax owed is calculated. If the tax due at that point is lower than the deemed disposal tax you have already paid, you get the difference refunded by the Revenue. This is obviously not possible if you have actually paid a real tax liability every 8 years.

Tax change

The exit tax on funds and ETFs is 41% and has been since 2014. It used to be tied to the same rate as DIRT but in 2017, the DIRT rate started its gradual reduction to its current rate of 33% while exit tax remained at 41%. While it looks unlikely that there will be any change to this rate, it cannot be completely ruled out. There is constant lobbying to get exit tax synchronised with the DIRT rate again.

By paying deemed disposal every 8 years, if the rate does fall, the actual tax due will be based on the lower rate. Likewise, if the rate increases at some point, the actual tax will be based on the higher rate (in this scenario, we will be triggering a real disposal for all investment clients).

 

Steven Barrett

16 May 2022