Deemed Exit Tax Calculation Formula

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Trex210777

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Hi folks, I have an Investment Plan which I took out about 20 years ago. I "prepaid" Exit Tax in 2017. I made a withdrawal in 2020.
I received current surrender breakdown but I'm questioning the Exit Tax due.
Where can I find more info on this or is there someone on this platform that could double-check it for me? I'm only a small amateur investor so not 100% on these things. I agree wholeheartedly with some of the other comments here re Exit Tax. Seems like such a hefty price to pay for what is a long-term investment. I'm seriously considering getting out of this and putting my money somewhere else. Any tips? TIA
 
It’s a while since I looked at it, but my understanding is that, let’s say:

- You stick in €100

- After 8 years, it’s worth €200

- After 12 years, you sell it for €259

So after 8 years, your deemed disposal charge is €41 (i.e. 41% of the €100 deemed gain).

Then after 12 years, that €41 tax on the deemed gain is added back to the €259 to give a notional value of €300.

Then 41% tax on the €200 gain is €82, less the €41 you’ve already paid, so just a further €41 to pay.
 
Gordon Gekko said:
It’s a while since I looked at it, but my understanding is that, let’s say:

- You stick in €100

- After 8 years, it’s worth €200

- After 12 years, you sell it for €259

So after 8 years, your deemed disposal charge is €41 (i.e. 41% of the €100 deemed gain).

Then after 12 years, that €41 tax on the deemed gain is added back to the €259 to give a notional value of €300.

Then 41% tax on the €200 gain is €82, less the €41 you’ve already paid, so just a further €41 to pay.
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Is it not more simple than that, after 12 years the total gain is 259 euros minus 100euros = 159 euros
the total tax is 41% of 159 euros = 65.19 euros
but because you already paid 41euros deemed disposal tax at year 8 then the residual tax due is
65.19euros - 41euros = 24.19euros

Also if at year 12 the value of the fund happened to fall back to for example 150euros well then revenue owes you back half the deemed disposal tax paid at year 8 because the fund value has now fallen below the deemed disposal value at year 8 of 200euros
 
joe sod said:
Is it not more simple than that, after 12 years the total gain is 259 euros minus 100euros = 159 euros
the total tax is 41% of 159 euros = 65.19 euros
but because you already paid 41euros deemed disposal tax at year 8 then the residual tax due is
65.19euros - 41euros = 24.19euros

Also if at year 12 the value of the fund happened to fall back to for example 150euros well then revenue owes you back half the deemed disposal tax paid at year 8 because the fund value has now fallen below the deemed disposal value at year 8 of 200euros
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I’m open to correction and not 100% sure, but if I had to stake my last tenner one way or the other, I think it’s the way I described it. Something in the back of mind is saying that you add the tax back in and pretend the 8 year deemed disposal part never happened and then just take a credit for what was paid.
 
Hi, for those who feel like doing some number crunching ;) Here are the actual figures. Knock yourself out :)

Deemed Exit Tax 2017
Gross Value(GV)
€34,108.39​
Eligible premiums(EP)
€24,403.98​
Profit (GV - EP)
€9,704.41​
Tax (Profit x 41%):
€3,978.81​
This is the Deemed Exit Tax(DET) figure.
Withdrawal 2020:
Gross Value
€10,658.78​
Eligible premiums:
€7,630.13​
Profit (GV - EP)
€3,028.65​
DET
€988.08​
Tax ([Profit + DET]*41%-DET)
€658.78​
Net Surrender (GV - Tax):
€10,000.00​
The Eligible premiums & DET have been proportioned by the withdrawal amount over total value on the plan as it should.
Current Surrender breakdown:
Gross Value
€42,212.25​
Eligible premiums
€28,058.80​
Profit (GV - EP)
€14,153.45​
DET
€2,990.74​
Tax ([Profit + DET]*41%-DET)
€4,038.38​
Net Surrender (GV - Tax)
€38,173.87​
In the current breakdown, the eligible premiums and DET amounts have been reduced by the amounts used in the previous Withdrawal.
 
@Gordon Gekko is correct. You do add the deemed disposal already paid back and then receive a credit for it.

I wrote an article on it last year running through the calculations. Everything is taken from the Revenue brief on it.

Calculating Deemed Disposal on a long term investment - Bluewater Financial Planning

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...
www.bluewaterfp.ie www.bluewaterfp.ie


Steven
www.bluewaterfp.ie
 
Hi Steven,

Thanks for providing that explanation on your website.

If I understand it correctly, it means that you would be better off making actual disposals each 8 years, rather than deemed disposals.

Using the sames figures as in your example, the total tax would work out as follows for both scenarios (assuming that you could fund the tax bill from other sources and reinvest the full amount at each disposal).

Have I understood this correctly?

Regards... 3CC

Deemed Disposals​
​
​
​
Actual Disposals​
​
​
Yr​
Value​
Tax​
​
Yr​
Value​
Tax​
1​
€100,000​
€0​
​
1​
€100,000​
€0​
8​
€200,000​
€41,000​
​
8​
€200,000​
€41,000​
16​
€300,000​
€57,810​
​
16​
€300,000​
€41,000​
20​
€400,000​
€64,702​
​
20​
€400,000​
€41,000​
​
​
​
​
​
​
​
​
Total​
€163,512​
​
​
Total​
€123,000​
 
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But what is the rationale for adding tax paid at year 8 to the fund amount at the end, if you paid the tax seperately to the fund ? I could understand adding back in the deemed disposal tax at the end if for example the tax paid was deducted from the fund value at year 8.
Surely the justification for deemed disposal is to get the same tax as if the fund had actually been disposed of. Why isn't the financial industry jumping up and down about this, the unfairness of it
 
Hey, could someone double-check the figures I posted. The withdrawal I made in 2020 is throwing me a bit and I can't for the life of me get the figures to match :rolleyes:
 
Trex210777 said:
Hey, could someone double-check the figures I posted. The withdrawal I made in 2020 is throwing me a bit and I can't for the life of me get the figures to match :rolleyes:
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You seem to have asked for €10k clear after tax.
So they had to work backwards to see how much of your gross value you had to cash to pay the tax and leave 10k net, the answer they came up with is €10,658.78.

The tax is calculated as GG says. and as is set out in the figures you supplied.

If you add the "Withdrawal 2020" box to the "Current Surrender breakdown" box you get the position were you to encash the whole lot. The tax would be €658.78 + €4,038.38 = €4,697.16. This is correct and follows GG's method (I can demonstrate this if you require). So overall no issue.

Because you are making a partial encashment they have to divie this tax up. To do this they have to divie up the eligible premiums and the DET. It is a mystery how they did that (it is not "proportioned by the withdrawal amount over the total value", as they assert but don't complain). It provides a "favourable" result as the tax on your partial encashment is only 6.18% but this is cancelled out by the fact that the tax on what you have left, if you were to encash tomorrow, is 9.57%.

One thing puzzles me. You say you have the plan for 20 years but there seems to be only one DET.
 
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Duke of Marmalade said:
You seem to have asked for €10k clear after tax.
So they had to work backwards to see how much of your gross value you had to cash to pay the tax and leave 10k net, the answer they came up with is €10,658.78.

The tax is calculated as GG says. and as is set out in the figures you supplied.

If you add the "Withdrawal 2020" box to the "Current Surrender breakdown" box you get the position were you to encash the whole lot. The tax would be €658.78 + €4,038.38 = €4,697.16. This is correct and follows GG's method (I can demonstrate this if you require). So overall no issue.

Because you are making a partial encashment they have to divie this tax up. To do this they have to divie up the eligible premiums and the DET. It is a mystery how they did that (it is not "proportioned by the withdrawal amount over the total value", as they assert but don't complain). It provides a "favourable" result as the tax on your partial encashment is only 6.18% but this is cancelled out by the fact that the tax on what you have left, if you were to encash tomorrow, is 9.57%.

One thing puzzles me. You say you have the plan for 20 years but there seems to be only one DET.
Click to expand...
Thanks @Duke of Marmalade. Could the fact that the DET rule came into effect from 10 October 2018 have something to do with it?
 
Trex210777 said:
Thanks @Duke of Marmalade. Could the fact that the DET rule came into effect from 10 October 2018 have something to do with it?
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Don't get you there. You yourself were subject to DET in 2017. I think it has been there almost from the start in 2001. Anyway I think I know what they do; they must accumulate all the previous DET calculations into the latest but they only pay over to Revenue the difference from the previous accumulation, it is all seamless to you.

They seem to have made a hames of working out the proportion of DET and eligible premiums due on your partial withdrawal as evidenced by a different overall tax rate on what you withdrew and and what you have left - they should be the same. It is slightly in your favour as you have the benefit of the shortfall in tax being deferred and continuing to be invested.
 
Trex210777 said:
Thanks @Duke of Marmalade. Could the fact that the DET rule came into effect from 10 October 2018 have something to do with it?
Click to expand...
If the total tax due amount is €4,697.16...if I were to cash in the full value, should that not be reduced by the amount of tax I already "prepaid" to revenue in 2017 to the value of €3,978.81 ??? This was handled by the fund manager. I didn't have to do anything
 
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