For years, if you saved money in an investment fund, your money accumulated under what is called a “gross roll up” structure. That is, the value of your fund grew without having to pay tax. The tax due on the fund was paid when you withdrew the money. Investing in funds was a great way of saving for children’s future education costs or part of your overall wealth accumulation strategy. The problem for the government was that people were keeping their money for too long and they weren’t getting their hands on tax income. So the Finance Act 2006 introduced “deemed disposal”.
Under deemed disposal, if you have money in an investment fund or an ETF, you have to pay tax on the fund every 8 years ie it is deemed that you made a disposal. The tax paid is the tax due on any profit made on the 8th anniversary of the investment. At present, the tax is 41% of profit. If there is no profit, not tax is payable. Also, if the fund subsequently falls in value and you cash in the fund, you can submit a claim to the Revenue for overpaid tax due to deemed disposal.
If you have your investment with an insurance company, they will deduct the tax for you and pay it over to the Revenue. If your investment fund is with a stockbroker or fund platform, you pay the tax yourself through your tax return. The money does not have to come out of your fund.
You can always invest directly in shares. You can carry out the research yourself and trade on your own account or you can engage a discretionary fund manager who will buy the shares on your behalf.
If you would prefer to invest in funds, you can purchase ETF’s that are domiciled in the US, EEA or other OECD countries. The Revenue have confirmed that ETF’s domiciled in these countries will not be subject to deemed disposal. In practice, people have been investing in ETF’s domiciled in the US or Canada. * Since this article was originally publised, PRIIPS legislation was introduced mandating that Key Investment Information Document (KIID) is provided to investors. As US and Canadian ETFs are not subject to EU regulation, they do not provide KIID’s for their ETFs so cannot be accessed by retail investors. If you use a discretionary fund manager, they can use these instruments. An alternative is investing in investment trusts out of the UK. ** A further update – on 1 September 2021, the Revenue revised their guidance and from 1 January 2022, non EU domicile ETFs are now subject to exit tax at 41% and deemed disposal.
Not only do you avoid deemed disposable but these ETF’s or direct purchase of shares aren’t liable to exit tax at 41% either, they will be subject the Capital Gains Tax which is currently at 33%. However, under the gross roll up regime, any dividends are reinvested without triggering a tax liability. If you are avoiding deemed disposal, any dividends paid are treated as income and will be taxed at your marginal rate to income tax and are also attract PRSI and USC.
If you have any questions, drop me an email at steven@bluewaterfp.ie