Tax Effective Regular Investing for DIY

B

Boyd

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Whilst this has been asked before (I have read so many boards and AAM threads at this stage....), I would again like to discuss investing smaller amounts on a regular basis. By small I mean circumstances 1 or 2 grand per month.

What are the requirements?

A wish list would be (not all concurrently, as some are mutuallying exclusive):
  • Low cost trading fees
  • Low TER of funds
  • Transparent fees, if relevant
  • Simple tax treatment, now and down the line
  • Sheltered from tax, now and down the line by accumulating fund as opposed to dividend payment
  • CGT as opposed to exit tax
  • Loss offsetting

What are the options?

From what I have read over last few weeks:
  • UCITS ETFs
  • EEA/OECD ETFs
  • US ETFs
  • Various funds from Quinn, Friends First etc.
  • Rabo funds
I am currently looking to see how I can develop a long term regular investing strategy. Each corner I turn, there is another issue. None of above seem to be fully satisfactory.

e.g. UCITS ETFs sound great until you realise the have to be reported to revenue every eight years, so if you invest once a month then you'll have have a taxable event every single month from year eight onwards, which is surely a pain. Not to mention if you invest in more than one.

Life funds are so opaque with charges, they would be rules out. Also even with seemingly small AMC of 1-2% over time this really really adds up.

Rabo funds seem decent but they charge .75% entry/exit plus the AMC plus any hidden charges and after that you have the issue of tax, same as UCITS ETF.

I just want to invest 1.5k per month, preferably DIY, so not in managed fund. Id like it so that it can accumulate tax free (aka gross roll up I believe) and be somehow tax efficient so I don't have a mess on my hands in eight years.

Can anyone help?! At this point Im veering towards buying (each month) three vanguard ETFs that are accumulating and worry about tax in eight years. Is this setting myself up for a serious headache down the line?

Thanks
 
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I have contacted Revenue about the 8 year issue so hopefully they will come back with full clarifcation on the tax, as I'm not sure if you need to complete form 11 every single month on the 8 year anniversary of each purchase, or just once a year. If it was only once a year it wouldnt be too bad.....
 
Direct investing in shares or investment trusts (closed-end funds listed on stock markets) are likely to be the best. From a tax viewpoint, both have gains taxed at CGT rate and there is loss relief. Bizarrely, EU UCIT regulated ETFs are taxed like gross roll up funds (gains tax rate currently 41%, no loss relief) while Non-EU ETFs are taxed like shares.

Investment Trust are, in my view, the best fund type. While they are actively-managed funds - which have (rightly) come in for criticism as they underperform indexes due to higher costs - they often come with discounts i.e. you can often buy into an investment trust at 90p on the pound. There are circa 350 investment trusts listed on the London Stock Exchange.

Both shares in companies and shares in investment trusts can be bought and sold through a stockbroking account. If you use a low-cost, online account you'll keep costs low.

For subscribers to our website, we actually run two live 'Regular Investor' portfolios, investing a real €1,000 each month, so we have to deal with all the issues you raise. It is our view that stock market-listed funds are superior to non-listed funds like the life company unit-linked funds, unit trust in the UK, UCITS funds or Mutual Funds (in the US).

Rory Gillen
GillenMarkets.com
 
Hi username123 (or anyone else!),

I'd be interested in knowing if you've made an headway in making a decision as to what to go for, as my shopping list and investment amounts would be quite similar. However the more I've been reading the more despondent I've been getting and wondering would I be better of just throwing the whole lot into AVCs instead and accept what may become of the investment...

However before throwing in the towel, to what extent do you think that either:

A - limiting investments to quarterly (and accepting that cost averaging takes a hit) and reducing the 8 year and on-wards headache that way; or..
B - Selling the whole lot at 7.5 years and buying immediately back in (hopefully getting roughly the same units (less the amount set aside for tax), and taking a larger hit on tax to your capital in one go) and repeating that every 7.5 years...

...might improve some of the challenges with UCITS ETFs?
 
Selling all after 7.5 is intriguing, if not s little risky! Any price move between sell and buy back could be a disaster!

I thought about option A as well but didn't like the reduction in buying frequency
 
username123 said:
Selling all after 7.5 is intriguing, if not s little risky! Any price move between sell and buy back could be a disaster!

I thought about option A as well but didn't like the reduction in buying frequency
Click to expand...

The other element I hadn't really considered but of course is a factor is that if you intend on re-balancing your portfolio by selling and buying between your funds, there'll be tax incurred on those gains crystallising which is just another punch against your capital. Does that offset the gains you'd have to pay after the 8 years? (And how would you calculate that!)

I think I might just seek out an advisor to work through all these issues with before committing to a strategy.
 
For rebalancing, you could change your purchasing strategy for couple of months until portfolio balances to what you want. Alternatively, if you have other liquid cash you could use that to pay the tax incurred, thereby not affecting your capital. Depends on situation obviously
 
Just for information all Vanguard ETFS are U.S. domiciled and therefore not accumulating. US ETFs apparently by law must distribute. I ran up against this problem too. If you want accumulating ETF's unfortunately you have to go down the EU domiciled route with 41% tax and 8 year gross rollover. Also you tally up your gains in the 8th year, but both FILE AND PAY in the 9th year. Revenue will confirm this. This has been discussed in several recent posts, with specific ETF revenue.ie contact info.
 
Thanks, yes I've read and re-read everything I could find on this forum about the area - your thread, landlord, with the table summarising costs is very useful. One question I had on it though under Ref 2 where you mention tax on ETF is rolled up every 8 years, I assume that only applies if you're doing single transactions and not multiple investments? Otherwise it's every year starting year 9.

In general, would the view be that (index) ETFs are still a relatively sensible / returns generating strategy (for the long term of 30 years+), despite the poor tax treatment in Ireland?
 
username123 said:
e.g. UCITS ETFs sound great until you realise the have to be reported to revenue every eight years, so if you invest once a month then you'll have have a taxable event every single month from year eight onwards, which is surely a pain. Not to mention if you invest in more than one.
Click to expand...

Within the calendar year whether you make one investment or 100, into one EU domiciled fund or 100 different ones, in the eighth year you tally up all your gains and then file and pay in the ninth year.
I do have to say that I have no practical experience of tallying up, filing and paying yet as I am still in year one of eight.
 
Perhaps a solution to your problem is buying a portfolio of individual shares that pay low/no dividends? I would be a fan of indexing, etc.. but given the tax situation here and the cost competitiveness of some of the fund providers in Ireland there is something to be said for buy and holding a portfolio. At 1.5k a month you could easily get 12 shares over a year that pay low/no dividends and then buy and hold/top up as appopriate. Then you fall under CGT regime, pay no mgmt fees, etc.
 
Guys apologies if I am misunderstanding, but I would have thought selling an EU UCITS ETF after 7.5 years would mean exactly the same tax liability and administrative work as a "deemed" sale at 8 years.
At 7.5 years you sell, tally up gains and then file and pay in the eighth year.
At 8 years you do not physically sell but for revenue purposes you make a deemed sale, tally up gains in the eighth year and file and pay in the ninth year. Of course any payment you make can be offset against any future deemed sale (at 16 years, 24 years etc....)or actual sale.
 
If you have an ETF that has made a loss are you also then deemed to have disposed it at a loss even if you never sold it , so for example buying at a cost of 20 for a unit , at 8 years it's worth 10 a unit . You do nothing and keep hold of it , at 16years you start paying tax on the gain from the 10'price not thr original 20
 
Fella said:
If you have an ETF that has made a loss are you also then deemed to have disposed it at a loss even if you never sold it , so for example buying at a cost of 20 for a unit , at 8 years it's worth 10 a unit . You do nothing and keep hold of it , at 16years you start paying tax on the gain from the 10'price not thr original 20
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I would imagine at 8 years (actually 9 for paying and filing) you pay nothing as you have made no gain, but at 16 years you start paying tax at any gain over and above 20.
As an aside just a reminder if you actually sell after 8 years the loss can not be offset against future gains.....assuming we are still talking about an EU UCITS ETF.
 
landlord said:
Guys apologies if I am misunderstanding, but I would have thought selling an EU UCITS ETF after 7.5 years would mean exactly the same tax liability and administrative work as a "deemed" sale at 8 years.
At 7.5 years you sell, tally up gains and then file and pay in the eighth year.
At 8 years you do not physically sell but for revenue purposes you make a deemed sale, tally up gains in the eighth year and file and pay in the ninth year. Of course any payment you make can be offset against any future deemed sale (at 16 years, 24 years etc....)or actual sale.
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Well what I was really getting at with the 7.5 years full sale of the ETF, was that you avoid the yearly tax returns after year 8 / 9 because year's 4, 5, 6 etc investments are all sold at that first year 8.

i.e. I don't see a huge amount of complexity in tallying up every 2015 investment in 2023 and then paying in 2024, but I do see it becoming a much bigger burden in 2024, 2025, 2026 etc as you repeat the process each year for investments in 2016, 2017, 2018 etc. And especially because even though from your perspective it's all part of the same fund, from reporting perspective you need to be able to report on the gains on each unit purchased each investment.

Currently however I'm thinking that figuring out the best way to deal with that challenge is a decision for another 6 or 7 years' time before the first 8 year rule kicks in, and in the meantime I'll just make sure to record granular information at each investment point now so hopefully the bulk of the information for the calculations is captured ahead of D-year!

Regardless of the deemed disposal difficulties, more importantly for long term strategies I wish Revenue would allow you to setup and declare your own "umbrella" structure within your portfolio of funds. I don't see why as a private investor you don't have access to that facility like any life company fund manager.
 
ThatNewGuy said:
Well what I was really getting at with the 7.5 years full sale of the ETF, was that you avoid the yearly tax returns after year 8 / 9 because year's 4, 5, 6 etc investments are all sold at that first year 8.

i.e. I don't see a huge amount of complexity in tallying up every 2015 investment in 2023 and then paying in 2024, but I do see it becoming a much bigger burden in 2024, 2025, 2026 etc as you repeat the process each year for investments in 2016, 2017, 2018 etc. And especially because even though from your perspective it's all part of the same fund, from reporting perspective you need to be able to report on the gains on each unit purchased each investment.

Currently however I'm thinking that figuring out the best way to deal with that challenge is a decision for another 6 or 7 years' time before the first 8 year rule kicks in, and in the meantime I'll just make sure to record granular information at each investment point now so hopefully the bulk of the information for the calculations is captured ahead of D-year!

Regardless of the deemed disposal difficulties, more importantly for long term strategies I wish Revenue would allow you to setup and declare your own "umbrella" structure within your portfolio of funds. I don't see why as a private investor you don't have access to that facility like any life company fund manager.
Click to expand...

Sorry .....got you now...an interesting idea for the dollar cost average investor.
Effectively resetting your tax liability every 7.5 years.
 
But if you sell at 7.5 years and rebuy the same portfolio a few weeks later I see it as less beneficial

Let's say you made a profit and paid tax after 7.5years , you rebuy everything at same price and it then drops in value - at 16 years you can claim back that loss against 8 years deemed disposal over payment but only if you didn't sell at 7.5 years , but selling at 7.5 years loses you this privilege . I hope you get what I'm saying . So in an scenario of profit at 7.5 years but somehow that pricr then dropped between the next 8 years you would be better off to just do deemed disposal and hold on to same etf
 
Fella said:
But if you sell at 7.5 years and rebuy the same portfolio a few weeks later I see it as less beneficial

Let's say you made a profit and paid tax after 7.5years , you rebuy everything at same price and it then drops in value - at 16 years you can claim back that loss against 8 years deemed disposal over payment but only if you didn't sell at 7.5 years , but selling at 7.5 years loses you this privilege . I hope you get what I'm saying . So in an scenario of profit at 7.5 years but somehow that pricr then dropped between the next 8 years you would be better off to just do deemed disposal and hold on to same etf
Click to expand...

Good point !!
wow this is getting complicated.
 
Fella said:
But if you sell at 7.5 years and rebuy the same portfolio a few weeks later I see it as less beneficial

Let's say you made a profit and paid tax after 7.5years , you rebuy everything at same price and it then drops in value - at 16 years you can claim back that loss against 8 years deemed disposal over payment but only if you didn't sell at 7.5 years , but selling at 7.5 years loses you this privilege . I hope you get what I'm saying . So in an scenario of profit at 7.5 years but somehow that pricr then dropped between the next 8 years you would be better off to just do deemed disposal and hold on to same etf
Click to expand...

I thought you couldn't offset losses on UCITS ETFs? Or is that only between separate purchase units?

I hadn't realised that if you paid deemed disposal on e.g. Feb 2016's purchase in 2024 / 25, then in 2032 / 33 if those same units were below the original deemed disposal you can claim back the difference? ,

That is certainly a benefit to holding on to them, but my god the complexity you'd have on your hands in 2032 when you've 192 individual investments (monthly investments) on your hands that you need to track original purchase price and specific gain for, and half of them are coming into their second cycle so you have to review original deemed disposal charges as well!!!
 
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