Calculating tax on investment fund gains

[Chris]

A friend asked me the other day about the tax implications on mutual fund investments which prompted to look into it. It seems that the tax treatment of funds is 33% on any gains with no exemption and losses cannot be used to offset gains. The confusion I now have is around the 8 year rule. As an example, my friend has been making regular payments into a couple of funds for the past 6 years or so, and so far has not sold any. When it comes to the end of the 8th year he would have to declare gains at that stage. Does he only declare gains he made on investments in the first year or on the entire investment in that particular fund over the full 8 years?
While losses in other funds cannot be used to reduce the tax liability I assume that if some of the fund contributions are up and some down, it could possibly make sense to sell out of a fund entirely to reduce a tax liability. Here an example: in year one 12 monthly investments of €100 were made that are on average up 50%; in year two the same monthly investments were made in the same fund but these are down an average of 10%. I'm now at year 8 and need to declare profit on year one which is €600. But as I have a €120 loss on my investment from year two, would I not be better off selling the whole lot and declaring a profit of €480?

 

[ashambles]

Several years ago I decided against making regular payments into investment funds where you’ve to do the tax yourself purely as the revenue tax treatment appeared to be on the clumsy side.

Rabodirect do have a few pages where they talk about how to handle this type of taxation. [broken link removed].
They’ve also some sort of online “tax aid” to help their customers work out the tax - don't think it's visible to non-customers unfortunately.

Perhaps a partial solution to the 8 year rule seemed to be to maybe every 7 years of so take the money out, pay the tax if any exists, and put it back in, with the goal of pre-empting the 8 year rule. You still need to work out the tax on FIFO (first in first out) basis so that won’t be easy either.

From Rabo

First In First Out (FIFO) is related to your tax liability if you buy units in the same RaboDirect fund at different times and then sell some of these units.
First In First Out (FIFO) is the method of calculating the tax charge where a person holds units in the same fund which have been purchased at different dates.

If you simply leave your money untouched and the 8 year rule starts to apply, it seems that after 8 years you’ll have a new tax bill to sort out every single month.

 

[jpd]

I also have invested in funds which become liable to the deemed disposal rule.

I think it's up to the Revenue to explain how the tax liability is to be calculated correctly - I would expect them to post a simple guide with examples on their web-site.

 

[ashambles]

I think it's up to the Revenue to explain how the tax liability is to be calculated correctly - I would expect them to post a simple guide with examples on their web-site.

I wouldn't be counting on it, particularly for less common tax problems.

This might fall into the category of things they expect you to figure out via your "tax advisor".

I've also seen cases a little like this where it seems like it's people like KPMG chasing up details for clients who point out that there's something awkward about some vaguely worded government change to taxation and the implementation details get hammered out in negotiations between the independent tax experts and Revenue.

Eventually then the information sometimes makes its way to the great unwashed indirectly via the accounting firms rather than via Revenue.

 

[John Conlon]

Gains on such funds are calculated as for CGT except for indexation of costs, which is now gone anyway and the bizarre situation of losses not being allowable.
The gain calculated as in the Rabo statement would be

market value of full holding at 8 year period

less cost of acquisition years 1 through 8.

This is the same approach as for shares to calculate the gain.

 

[jpd]

I Don't think it's that clear if you buy units in the fund at different times, does the 8 eight year apply to the different purchases one by one or does it apply on the 8th anniversary of the first purchase but to the full holding?

For example, if I bought 1 unit in 2004 and 99 units in 2011, am I liable to tax on the gain of the full 100 units worth or just the 1 unit I bought 8 years ago?

Also, do you calculate the gain on a first in, first out basis or average cost basis?

I can't find definitive answers to these questions on the revenue web-site.

Presumably, if you own Irish based funds they will do the calculation for you - but what if you want to check it has been correctly or own foreign based funds?

 

[ashambles]

While there are similarities I don’t think tax on funds can be compared to CGT on shares.

The tax rate is 33% or 34% for exit tax on funds – not 30% as with CGT.
There’s no provision to offset losses against gains as with CGT.
A gain on shares becomes taxable only when the share is sold, with funds there’s a deemed disposal after 8 years where tax must be paid.

That deemed disposal after 8 years is the main problem, with funds many people would like to steadily invest month by month, or even week by week. Each payment has a different 8 year end date. For a long term investor the hassle will multiply again after 16 years.

This hasn’t become an issue yet because they only created this 8 year deemed disposal in 2006.

Here’s a 2008 accounting firms interpretation of amendments to the original muddled thinking for the situation where the fund provider pays the tax. Seemingly the industry wasn't happy with the complexity and administrative burden for themselves - let alone an individual working it out.

[broken link removed]

One item that they highlighted is that despite not being able to offset losses, an investor can however reclaim tax if there was profit at deemed disposal, but at actual disposal there was a loss. This removes one reason to ensure you sell a fund after at the 8 year mark. However even if the fund provider pays the tax, it’s up to the individual to reclaim the tax.

I’ve got to think that neither the minister involved (Cowen I think) or any of the officials had the slightest idea of what real world investing involves. (People invest regularly? Funds can drop in value? Why don't they just invest in a BTL?)

 

[3CC]

..... with funds there’s a deemed disposal after 8 years where tax must be paid.

........

This hasn’t become an issue yet because they only created this 8 year deemed disposal in 2006.

Hi ashambles,

Do you know if the 8 year rule referred to above is retroactive. ie will funds purchased in say 2000 be deemed disposed of in 2008 or in 2014 (8 years after the introduction of the rule)

Thanks,

3CC