41% to 38% reduction in exit tax on life assurance products

[Duke of Marmalade]

Why would that be? And what would they be doing to facilitate it that they don't already?

You would get a tax rebate which may or may not be reinvested.
Encash and re-enter may not be entirely frictionless, such as entering a fresh 5 year encashment penalty period. There may even be pressure to absorb the 1% levy, possibly with a penalty period.

 

[CharlieMac]

Ok so it's retrospective in the calculation of DD for ETF units still held and you could potentially end up entitled to a rebate.

 

[ClubMan]

Ok so it's retrospective in the calculation of DD for ETF units still held and you could potentially end up entitled to a rebate.

Isn't that the way it always was before the DD/exit tax rate cut depending on how the investment performed across 8 yearly DD anniversaries?

Key Post - Strategy around the 8 year deemed disposal

I have no practical experience of this and I have recently been asked about it. (It's a mad system but this is not a thread for letting off steam about it.) First to clarify how it works. I bought a unit-linked fund for €100k 8 years ago. Today, it's worth €140k. The fund deducts 41% tax...

www.askaboutmoney.com

I noticed that my recent deemed disposal on an investment involved a refund/credit. I'll see if I can dig out the numbers. As far as I recall it was its second 8 year deemed disposal.

 

[GSheehy]

If so, the reduction in tax is only costing 2.3 million in a year. Or are other categories involved as well?

You need to add the 4.1 to it as well. Even at that, I was really surpised at how low it was given that they're around for, what, 25 years. Were you?

 

[Fortune]

you could potentially end up entitled to a rebate.

The DD exit tax is treated as a credit on the exit tax calc.

 

[Duke of Marmalade]

Isn't that the way it always was before the DD/exit tax rate cut depending on how the investment performed across 8 yearly DD anniversaries?

That's true, but more stark now. If the cut had been to 33% the issue would have been quite acute - not sure the life companies would have welcomed that.

 

[Duke of Marmalade]

Irish investment funds and ETFs, equivalent offshore funds, and managed funds from life assurance companies are affected by the change in rate. The total impact is 40M (Table 1).

Missed this. I presume this did not calculate the cost of rebates which an earlier finger in the air suggests around €150m.

 

[CharlieMac]

The DD exit tax is treated as a credit on the exit tax calc

So you can't ask for a refund from Revenue but you can use any "overpaid" tax as a credit for when you finally sell units.

 

[Duke of Marmalade]

I have been refreshing my memory on this. Below is the history of DIRT and the Exit Tax.
Before 2001 Life policies were taxed internally at standard rate on interest plus CGT on gains. This was equivalent to look through except for the very significant concession that a "composite" rate equal to the standard rate applied. This was at variance to the origins of this quaint system in the UK where higher rate taxpayers paid and still do pay higher rate tax on the top slice of their gains.
In 2001 the EEC force Charlie McCreevey to introduce gross roll-up.
The discussions between the DoF and the IIF centred on what tax rate should apply on exit- with the Life companies clinging to their cherished standard rate composite at source. In the end a 3% addition to standard rate was agreed, the addition to allow for the gross roll-up. At the time DIRT was actually 25%. There was a recognition here of encouraging long term saving. Oh how things have changed.

Fast forward and the financial crisis ditched all theoretical finesse and put both the Exit Tax and DIRT at an emergency 41%.
This crisis reaction has been reversed for DIRT, though ignoring the crisis blip 33% is historically high.

The 41% was retained for the Exit Tax with really no justification and it seems the normalisation will be slow but these are after all long term products. DIRT alignment must be the long term resting place. I do believe the DD rebate issue discussed above is hampering the immediate move to alignment.

 

[RainyDayFund]

The 41% was retained for the Exit Tax with really no justification and it seems the normalisation will be slow but these are after all long term products. DIRT alignment must be the long term resting place. I do believe the DD rebate issue discussed above is hampering the immediate move to alignment.

Thanks for the reminder of the path we took. It is certainly illuminating to see it all, and makes our current location even more outrageous.

Your long term resting place is similar to my viewpoint. I actually think CGT alignment must be the ultimate goal. DIRT alignment would be a decent halfway house, but really ETFs are capital assets and should sit under CGT, just like direct shares. The current Exit Tax regime still treats them as if they were deposit substitutes, which makes no sense given how they actually behave. And divident income is just income. This is simple, logically consistent, and far less distortionary than what we currently have.

In fact, the DD and exit tax are so distortionary that they even make overfunding a pension attractive. Because compounding pre‑tax inside pensions is powerful, the “wedge” between gross roll‑up (pension) and the 38% regime generally dominates even if you eventually graze 40% CET (i.e. exceed the Standard Fund Threshold).

In terms of long-term wealth building in Ireland, pensions dominate because of upfront relief and tax-free growth. Property is next, and it beats ETFs on tax efficiency for long-term holds (CGT 33% vs Exit Tax 38%, no deemed disposal), but rental income is heavily taxed and liquidity is poor.

Then come individual shares (the stock "horse-picking" route) which sit between property and ETFs, and often above property on efficiency grounds. On a pure tax basis, direct equities actually sit ahead of property. But in practice, concentration risk and admin mean most people don’t get the same diversification they’d get via ETFs, even if the tax code penalises those more diversified options.

ETFs are the least tax-efficient under current Irish rules for long-term compounding.

I'm okay with pensions being #1 (we do need to encourage people to squirrel something away for later in life), but having property ahead of ETFs purely as a result of taxation policy when we already have a shortage of housing seems both insane and counter-productive.

I'm far less worried about tax leakage and far more worried about unproductive cash in banks, and inadvertant cashflows to property and to direct equities. Time to find my crayons for yet another howler letter to the Ministers and to my local government TDs.

 

[Duke of Marmalade]

@RainyDayFund My background is life assurance. Life policies totally dominated non pension long term savings right up until relatively recent times. There was actually a time when you got income tax relief on 2/3rd of your premium (or 1/14th of the sum payable on death, if less). The actuary of Irish Life when I was a trainee in the 70s "invented" the Money Spinner, and that description would not have offended the Trade Descriptions Act - it could even involve borrowing which in those days even retail savers could claim tax relief on.
The other great savings feature of the life policy was that it was taxed internally at the composite standard rate on income and CGT on capital gains (including in most product designs unrealised gains, with the life company using the tax deferral for profit and reducing explicit charges like bid/offer spreads).
Life companies prize the fact that policyholder taxation is at source and, crucially, at a composite rate. The original Gross Roll Up regime was very attractive, 23% Exit Tax and unlimited tax free roll-up. That latter just had to give, and will not be coming back IMHO.
Your background seems to be more oriented to non Life collective investments like ETFs and whilst I see most of your points, gross roll-up indefinitely of dividend income in accumulator funds is difficult to justify and certainly not available in His Majesty's jurisdiction, though I think @Marc has suggested that such a vehicle is available here.
Interesting point on pension fund gross roll-up even covering CET. I will cobble together a spreadsheet to investigate that.

Time to find my crayons for yet another howler letter to the Ministers

Put your letter on a piece of cardboard to make it really stiff

 

[RainyDayFund]

gross roll-up indefinitely of dividend income in accumulator funds is difficult to justify and certainly not available in His Majesty's jurisdiction, though I think @Marc has suggested that such a vehicle is available here.

@Duke of Marmalade I agree! That's why I suggested dividend income should be treated as income and subject to regular income tax. I'm not suggesting an ETF be treated like a pension - just that it should be treated more like direct equities, with gains subject to CGT and dividends subject to income tax - and no deemed disposal nonsense or exorbitant exit charges or lack of loss relief.

Interesting point on pension fund gross roll-up even covering CET. I will cobble together a spreadsheet to investigate that.

I don't think it covers CET, but I recall doing some Monte Carlo comparisons of overfunding to the point of CET vs investing the same funds into an ETF. Depending on time to retirement (accumulation) and time post-retirement (drawdown), overfunding looked a less worse option than ploughing into an ETF.

I don't remember the exact specifics, but I came to a conclusion that with 10 or more years of pre‑retirement compounding and 6% draw for 20–30 years, over‑funding above SFT beats the ETF route on cumulative spend, even at low-ish market returns of 5% (log-normal model). It was more an indictment of ETFs than a persuasive argument for overfunding a pension into CET territory. I guess it is mostly because the taxing of growth on pensions happened on the withdrawals, not the growth of the entire fund.

 

[Duke of Marmalade]

I agree! That's why I suggested dividend income should be treated as income and subject to regular income tax. I'm not suggesting an ETF be treated like a pension - just that it should be treated more like direct equities, with gains subject to CGT and dividends subject to income tax - and no deemed disposal nonsense or exorbitant exit charges or lack of loss relief.

Violent agreement!

I don't think it covers CET

I found the below in my archive. My recollection (treacherous these days) was that I had read a DOF commissioned report by Donal De Butleir on this topic (attached). He was recommending a CET rate of 10% (instead of 40%). This spreadsheet did a goal seek on the investment return which would put this in equilibrium with a Life policy. The answer was 6.8% p.a. That has gone up to 8.1% for a 38% Exit Tax.

 

[Mathematician]

Even at that, I was really surpised at how low it was given that they're around for, what, 25 years. Were you?

Yes, I thought it was extrodinarily low (and still do even with the extra bit).

 

[Marc]

@Duke of Marmalade i dug into some of these issues in my webinar for the Society of Actuaries

Personal investing in Ireland – challenges & opportunities

Personal investing in Ireland – challenges & opportunities

Investing personal assets in Ireland is not easy principally because of taxation. In order to build a diversified portfolio outside of a pension vehicle, ret...

youtu.be

The swap-based ETP I reference is about the most tax efficient investment I’ve found for an Irish investor outside of a pension in the last decade or so.

50% of the global stock market for 5 Bps, no income tax and perpetual deferal of tax with a step up in base cost on death is about as good as you are going to get.

I also use the example of systematically overfunding a PRSA above the SFT given that, again, death isn’t (currently) a benefit crystallisation event and the excess can be deferred up to age 75.

 

[Duke of Marmalade]

@Marc I'll give your post more consideration tomorrow.

 

[RainyDayFund]

@Marc that video is brilliant - thanks for posting the link.

The swap-based ETP I reference is about the most tax efficient investment I’ve found for an Irish investor outside of a pension in the last decade or so.

50% of the global stock market for 5 Bps, no income tax and perpetual deferal of tax with a step up in base cost on death is about as good as you are going to get.

I guess for swap ETPs, you need to consider:

• Are there complications over what swap-based ETPs qualify for this favourable treatment? For example, structure/documentation?
• Is it a risk that Revenue's "view" of this could change and the product might no longer be CGT-eligible?
• Is there a counterparty risk? I.e. if the institution providing the swap were to fail, what happens?

And again, to my mind, its utter madness that we have swap ETPs which are taxed under capital gains rules, not fund rules, performing virtually the same job as ETFs. It just shows Revenue need to simplify and get rid of the nonsense around ETFs. A missed opportunity yet again in this budget.

 

[Marc]

@RainyDayFund thanks.

Yes, it’s a very good example of the madness in the system.

It not a UCITs but it’s UCITs eligible. That makes it a “complex instrument” under MIFID snd therefore subject to an appropriateness test which is completely different to a suitability test.

Yet it’s still regulated by the Central Bank and from a risk perspective, fully collateralised and the swap is with a highly reputable investment bank.

It’s therefore analogous, though for the avoidance of doubt, not exactly the same, as a tracker bond sold by the bucket load.

It’s exchange traded, yet because it’s a debt instrument and not a fund, it’s generally accepted, though not guaranteed, that it is taxed under general tax principles so CGT on gains.

It’s an EU fund so trades in Euro so no FX costs and it squarely deals with US Federal Estate tax issues that plague US ETFs.

It’s very low cost so that when I drop it into my investment trust portfolio the overall weighted ongoing charge drops to around 0.45%pa for a portfolio which closely tracks MSCI ACWI.

When I argued all of this is undemocratic and essentially unfair I was pointed to the fact that tax policy doesn’t have to be fair and equitable despite a clause to that effect in the Constitution. It just needs to ensure that everyone is treated the same, even if that means bonkers outcomes for some people and virtually zero tax for others.

Yes, a missed opportunity in the Budget, but then again, did you really expect anything better?

 

[GSheehy]

Yes, I thought it was extrodinarily low (and still do even with the extra bit).

Hard to believe the the tax take from the 1% Government Levy on Life Assurance Products alone was nearly half the entire take from ETF Exit Tax in 2024. Maybe it's just online hype that makes us think that the World and their Mother are investing in ETFs.

 

[ClubMan]

Hard to believe the the tax take from the 1% Government Levy on Life Assurance Products alone was nearly half the entire take from ETF Exit Tax in 2024. Maybe it's just online hype that makes us think that the World and their Mother are investing in ETFs.

Maybe also many ETF investors aren't discharging their DD/encashment tax liabilities through ignorance or otherwise?