Comparing 1% a year with Deemed Disposal and IT/CGT

[LarryScott]

Assuming a 1% "wealth tax", it would be better than CGT, and a lot better than exit tax.

The actual tax free portion would be even better.

Assumptions
Initial investment: €1000
Investment return (pre-tax): 6%
Period: 16 years

Net value at end
ISA: 2183
CGT: 2032
ETF: 1872

ISA

Wealth tax: 1%

Effective return: 6% - 1% tax = 5%

Final value: 1000 * (1.05^16) = 2183

CGT

Final value: 1000 * (1.06^16) = 2540
Gain: 1540
Tax (33%): 508

Net of taxes: 2032

ETF

End first 8 year cycle

Value at 8 years: 1000 * (1.06^8) = 1594
Gain: 594
Deemed disposal tax (38%) : 226

So, you need to sell 226 worth of ETFs to pay the tax.

This is 14.18% of your investment. That counts as an actual disposal, rather than deemed.

Tax on an actual disposal: 0.1418 * 226 = 32
Tax on deemed disposal: 226-32 = 194

Value of ETFs: 1594 - 226 = 1368

End second 8 year cycle

Initial value: 858 (since 14.2% sold)
Final value: 1368 * (1.06^8) = 2180
Gain: 1322
Tax: 502
Offset (period 1): 194 (NOT including the actual disposal of 32)
Net tax (period 2): 308

Value of ETFs: 2180 - 308 = 1872

Note: if the tax was like CGT but with a rate of 38% of gain without deemed disposal, it would be 1955.

Note2: If you just work out the gain for the 2nd period and multiply by 38%, you get the same tax. However, technically, it is an advance payment of taxes in period one that has to be offset against period 2.

 

[Duke of Marmalade]

Or the ETF net return every 8 years is +36.8% and so after 16 years is 1.368 x 1.368 - 1 = +87.1%

 

[LarryScott]

Or the ETF net return every 8 years is +36.8% and so after 16 years is 1.368 x 1.368 - 1 = +87.1%

Rounding error on my part, for +87.2%

I did the ETF calculation out fully partly to show how complex it actually is.

The deemed disposal isn't an actual disposal, so you need to offset any payment from the deemed disposal against future tax on the actual disposal. The future tax has to be based on the most recent actual acquisition, not the deemed disposal.

 

[Brendan Burgess]

I attach my spreadsheet for review to see if I have it roughly correct.
When I have it correct, I can vary the assumptions.
But I use the same assumptions as Larry over 8 years and get a different answer.

 

[Brendan Burgess]

I am assuming 50% tax on dividends

I am not allowing for the annual CGT exemption.

I am not allowing for any exemption on the Irish ISK

 

[Brendan Burgess]

Or to just compare the ISK at 1% with deemed disposal

It seems that 2% return is the break even point. Anything less than that or a negative return would make DD better than the ISK. Anything over that and the ISK is much better.

 

[Zion2022]

Assuming a 1% "wealth tax", it would be better than CGT

Is this blanket statement true? You’ve assumed 16 years but assumedly this longer the time frame, the more CGT catches up/passes out?

Also crucially for some (usually welathier) people, CGT liabilities expire on death.

 

[Raskolnikov]

Also crucially for some (usually welathier) people, CGT liabilities expire on death.

Even if CGT is extinguished upon death, the equivalent 33% rate is levied via CAT above amounts of €400k.

Even if someone was willing to forego a lifetime of capital gains, there's really only scope for part of what they bequeath to benefit from this "loophole".

 

[LarryScott]

But I use the same assumptions as Larry over 8 years and get a different answer.

The reason for the CGT difference is that you included dividends at a higher tax rate.

Is this blanket statement true? You’ve assumed 16 years but assumedly this longer the time frame, the more CGT catches up/passes out?

Right, it does make a difference as the term gets longer. Deemed disposal really hits as the term lengthens.

Duration	ISA (1%)	CGT (33%)	ETF (38%)
8	1477	1398	1368
16	2183	2032	1872
24	3225	3042	2561
32	4765	4653	3504
40	7040	7221	4794
48	10401	11313	6559
56	15367	17836	8974

The crossover is around 35 years, and even then it isn't huge. For long term estate planning, CGT is great.

 

[Brendan Burgess]

The reason for the CGT difference is that you included dividends at a higher tax rate.

I had forgotten I had done that. And it makes that much of a difference?

8 years at 2% = 16% @ 17% extra = c3% or €30

Sorry, I had misread your figures. We are not that far apart.

 

[Zion2022]

Even if CGT is extinguished upon death, the equivalent 33% rate is levied via CAT above amounts of €400k.

But funds in the ‘ISK’ scheme and exit tax (save for the final few years in exit tax which you get a credit for) do not benefit from this ability to potentially avoid paying any tax at all…and they still pay CAT as well with all the same thresholds and rates.

It’s a unique benefit to CGT that is a material factor to consider when comparing the tax bills from each.

 

[Fibbernacci]

I wonder is the comparison of what happens with 1000 through CGT totally relevant for most people. Which Joe Soaps should be active stock pickers anyway? I'd be more interested if the SIA would facilitate tax-free switching and rebalancing, which would likely be super important if buying individual stocks. And if dividend income was shielded I think a lot of people would like a dividend portfolio of less volatile blue chips to 'set and forget'

 

[Brendan Burgess]

I'd be more interested if the SIA would facilitate tax-free switching and rebalancing,

That is integral to the Swedish Model. If you have €100k in New Ireland Crypto Fund and switch to Irish Life Boring Equity Fund, each will charge you an adjusted 1% on your balance. The dividend income is irrelevant - it is not otherwise taxed.

 

[Brendan Burgess]

I wonder is the comparison of what happens with 1000 through CGT totally relevant for most people.

Certainly not €1,000. But it's worth seeing how the different tax treatments impact growth.

When the final scheme is announced, we will have to see its implications for different cohorts.

An older person with substantial unrealised capital gains will stay well away from it as the capital gains will disappear on death.
A younger person saving generally who is likely to cash their fund long before they die, would probably opt for it.
Someone in a deemed disposal product would probably cash it if it's in positive territory but hold onto it if it's in negative territory.

And the amount of the tax-free exemption will be critical. If the first €30k is tax-free, people should put their first €30k in this fund.

 

[joe sod]

this blanket statement true? You’ve assumed 16 years but assumedly this longer the time frame, the more CGT catches up/passes out?

Exactly i saw the figures run somewhere else and cgt is alot better than wealth tax the longer the time period, definitely after 20 years.
Also the bigger the starting sum then wealth taxes are alot worse, if you start of with 100k rather than 1K , than 1% is taking alot more .
Another issue is if we enter a prolonged downturn with investment values falling the government is still taking 1% from everything even if your investments are falling in value. Remember 2008 and 2009, would you like another 1% being lopped off by the government when your bank shares have collapsed?
The pressure also needs to be kept on the government to get CGT back to reasonable levels, 25% and the CGT free allowance raised to at least 5000euros, thats where it should have been if raised with inflation.

 

[Zion2022]

The pressure also needs to be kept on the government to get CGT back to reasonable levels, 25% and the CGT free allowance raised to at least 5000euros, thats where it should have been if raised with inflation.

Without taking a position on whether this should happen or not, I think it’s safe to say that this new scheme makes any major changes to CGT highly highly unlikely. They will not want to improve the attractiveness of the alternative in fear of this much promoted new scheme landing flat on its face.

The official position will be that for all ‘regular’ retail investors, the ISK is the one stop shop (I believe this term has already been briefed to media). Therefore a cut to CGT would be of no benefit to middle income Ireland and have no political support.

 

[yellowmoose]

Without taking a position on whether this should happen or not, I think it’s safe to say that this new scheme makes any major changes to CGT highly highly unlikely. They will not want to improve the attractiveness of the alternative in fear of this much promoted new scheme landing flat on its face.

AFAIR M Martin's reasoning that the current rates were too high was that the state was losing out on any tax revenue because business owners were moving out of the jurisdiction when selling their businesses. The ISK will not change this situation.

 

[Zion2022]

because business owners were moving out of the jurisdiction when selling their businesses

I feel like this uber capitalist/inter country competitiveness view is only taken in Ireland in relation to corporation tax. The exact same arguments could be made in relation to income tax.

Rather than chasing headline rates to the bottom they typically try to tinker with reliefs like SARP for income tax or entrepreneurial reliefs for CGT.

I hope I’m wrong but I would be shocked to see a broad brush slashing of CGT or income tax given all the warnings about our tax base. If they did, they would have to adjust the savings scheme to ensure it remained competitive with CGT.

 

[yellowmoose]

I hope I’m wrong but I would be shocked to see a broad brush slashing of CGT or income tax given all the warnings about our tax base.

CGT revenue did increase when the rate dropped previously.

 

[yellowmoose]

Ireland’s deemed disposal rule, which applies a 38 per cent tax on unrealised gains in exchange traded funds (ETFs), is “too high” the finance minister has admitted.

Tánaiste and finance minister Simon Harris said despite a reduction in the tax rate from 41 per cent to 38 per cent in the last budget, he believes “there's a broader question around the policy rationale for deemed disposal now.”

He noted a recent funds review suggested an overhaul.

“I do think the deemed disposal issue is posing a real challenge for Irish investors,” he said.

“And I do think the policy rationale for now is questionable at best, and I would like to see further progress.”

Finance minister questions ‘too high’ ETF deemed disposal tax​

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