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

[Duke of Marmalade]

the deemed disposal can crystallise tax at an inopportune time

It's only a down payment. It can always be reversed at an opportune time. In fact it favours the punter for whilst she can reverse an “overpayment” she would let an “underpayment” run.

 

[Duke of Marmalade]

When it was first introduced the equivalent rate was DIRT + 3%

Correction. It was actually standard rate +3% (23%). DIRT at the time was 25%

 

[Fortune]

this once-in-a-generation opportunity for meaningful reform

Ridiculous that putting things back the way they were is seen as meaningful reform.

 

[RainyDayFund]

It's only a down payment. It can always be reversed at an opportune time.

Yes, but you don't get to catch-up on the opportunity cost for growth on that draw down reversed also... You have lost that forever. And reversing at an "opportune" time requires a lot more active control and foresight than passive inopportune crystallisation.

My point is that yes, you can linearly approximate an 8-year recurrent deemed disposal of 38% being akin to 33% DIRT annually. But how often does growth in ETFs occur in a purely linear fashion? Virtually never... and so outcomes could be substantially worse. They are not the same policy of taxation, and if the justification for 38% was that it in some linear-approximation model it looks like 33%, then that is lazy modelling.

Sequence of returns risk can significantly impede growth, and a linear approximation for growth is not a great model for exploring outcomes.

 

[Duke of Marmalade]

then that is lazy modelling.

You might be right.
I will do a bit of Monte Carlo modelling to assess the effect of volatility versus steady growth.

 

[Duke of Marmalade]

But how often does growth in ETFs occur in a purely linear fashion? Virtually never... and so outcomes could be substantially worse. T

Finally got round to modelling this.
Below are the results. (the spreadsheet is also attached0
The light blue background figures are the average annual growth in 1,000 simulations over 40 years with volatility of 15% p.a. and input growth parameter in the second line.
The yellow background figures are the same simulations but at 38% DD every 8 years.
The bottom line are then the annual tax equivalents of the 38%/DD8 regime.
On average it does not bear out your intuition, but of course the result in a particular experience will vary. I suppose the next step is to examine the actual spread of the annual equivalent.

 

[fistophobia]

I am meeting Jack Chambers next month.
Going to ask him a few questions about the plans to reform ETF products.
In a journalistic style... asking questions, as if I know nothing about ETFs.

 

[RainyDayFund]

Finally got round to modelling this.
Below are the results. (the spreadsheet is also attached0
The light blue background figures are the average annual growth in 1,000 simulations over 40 years with volatility of 15% p.a. and input growth parameter in the second line.
The yellow background figures are the same simulations but at 38% DD every 8 years.
The bottom line are then the annual tax equivalents of the 38%/DD8 regime.
On average it does not bear out your intuition, but of course the result in a particular experience will vary. I suppose the next step is to examine the actual spread of the annual equivalent.

I haven't gone through your spreadsheet yet, but I'm wondering: when you say "on average", what you are refering to?

Are you saying that if you model a particular outcome with and without deemed disposal overlaid on top, on average this is equivalent to the without case with ~33% applied at the end? That isn't terribly surprising, as its almost similar to the linear approximation case.

How many simulations are below this average, and have worse outcomes? How many are above? And, as you comments, what is the spread?

And what time duration did you use? I imagine the results will be impacted by whether the duration is a multiple of 8, so its probably interesting to sweep exts at 1, 2, 3, 4, 5, 6, 7 years also...

Even if the 38% DD every 8 years approximates CGT in the "average" case, this doesn't make it a fair or non-lazy modeling of the situation. A particular experience could be drastically impacted by the 38% DD if it had poor sequence of returns risk - as the credit for the DD isn't index linked or uplifted to cover missed growth (particularly over the best days)...

 

[GSheehy]

I am tempted to move abroad, wait for 3 years and sell units. I am heavily invested in ETFS, before they became popular.

In a journalistic style... asking questions, as if I know nothing about ETFs.

Because telling him the truth would be wrong, why?

I don't think he's stupid and would fall for a deception.

 

[ClubMan]

In a journalistic style... asking questions, as if I know nothing about ETFs.

Fake shakedown?

 

[Duke of Marmalade]

I haven't gone through your spreadsheet yet, but I'm wondering: when you say "on average", what you are refering to?

I did struggle with what "average" means. There are at least two versions and they give different answers. I was calculating the average final outcome and then taking its 40th root. An alternative is to average the 40th root of each outcome.

Are you saying that if you model a particular outcome with and without deemed disposal overlaid on top, on average this is equivalent to the without case with ~33% applied at the end?

I am calculating the equivalent annual rate of DIRT. CGT at the end would be easily better than any intermediate taxation. I suspect they see DIRT as their benchmark as it is a composite rate of tax at source.

How many simulations are below this average, and have worse outcomes?

50/50 I presume

And what time duration did you use? I imagine the results will be impacted by whether the duration is a multiple of 8, so its probably interesting to sweep exts at 1, 2, 3, 4, 5, 6, 7 years also...

Yes I chose 40 years as it is a multiple of 8. Intermediate durations would be slightly more disadvantaged as they will only have enjoyed gross roll-up since the last DD point.

Even if the 38% DD every 8 years approximates CGT in the "average" case, this doesn't make it a fair or non-lazy modeling of the situation. A particular experience could be drastically impacted by the 38% DD if it had poor sequence of returns risk - as the credit for the DD isn't index linked or uplifted to cover missed growth (particularly over the best days)...

I guess this is your substantive point. I will do more doodling to test your conjecture.

 

[Duke of Marmalade]

@RainyDayFund I attach a spreadsheet which purports to show that a DD8 tax rate of 36.4% would equate to a 33% annual tax rate.
I have made the following simplifications. I assume there is no tactical rebalancing of the DD8 tax and that both the 33% annual rate and the DD8 rate also apply to losses.
The standard deviation of the difference in the average annual returns over 40 years is 14 bps, i.e. negligible.

 

[RainyDayFund]

The standard deviation of the difference in the average returns over 40 years is 14 bps, i.e. negligible.

It's a very interesting result. It definitely does add credence to the suggestion that they tried to equate it as close as possible on average and for 8-year aligned DD to DIRT @ 33%.

( Which then begs the question as to why? Why a deemed capital disposal is being treated like an income distribution? Of course there is always the larger question of why the deemed disposal in the first place, taxing of a non-existent event. )

 

[Duke of Marmalade]

taxing of a non-existent event.

Like the LPT.

 

[RainyDayFund]

Like the LPT.

A fair point indeed.

Personally, I tend to tend to think of the LPT more as a kind of local services provisioning tax -- funding things like street maintenance, lighting, parks, and so on -- rather than a pure property levy. But that's just my own mental pigeon hole for it.

I do like the UK’s model where local councils send out an annual council tax statement showing how your money is spent. It doesn’t make the tax any more fun to pay, but at least it mentally connects the cost to visible local services.

 

[Zebedee]

Thank Duke for all your work on the exit tax. Plenty of food for thought.

 

[JamieB_]

A fair point indeed.

Personally, I tend to tend to think of the LPT more as a kind of local services provisioning tax -- funding things like street maintenance, lighting, parks, and so on -- rather than a pure property levy. But that's just my own mental pigeon hole for it.

I do like the UK’s model where local councils send out an annual council tax statement showing how your money is spent. It doesn’t make the tax any more fun to pay, but at least it mentally connects the cost to visible local services.

Also its not the property owner who pays the council tax. Its the people living in the area.

 

[richiculous]

I am tempted to move abroad, wait for 3 years and sell units. I am heavily invested in ETFS, before they became popular.

This is something I have been thinking about for a while (I am already abroad).

I left Ireland in March 2022. With the way residency works, I remained resident in Ireland that year and have had almost 3 full years of ordinary residence since then from 2023 - 2025. Am I right in thinking that I can dispose of ETF units without any exit tax liability to Ireland once I become fully non-resident in 2026? Would it make a difference if I moved back to Ireland later in 2026 (becoming resident later in the year after the sale of ETF units while non-resident)?

If so, the timing would work well for me because I bought my first batch in mid-2018 so they are approaching the 8 year mark too.

 

[JamieB_]

I had a colleague years ago who retired at 50 and moved from Santry to Newry because of investment taxes. He did say his wife wanted to buy an apartment in Dublin as well as the house in Newry, but its only an hours drive if they did want to visit their children and friends in Dublin. Havent heard from him since so dont know how they got on after. He was telling me though that there were massive differences in the tax paid if you were living off your investments.