ETFs, Exit Tax on Death, and Capital Acquisitions Tax

Investor

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In Dominic Coyle’s article, “Selling shares to avoid capital gains tax after you die is mistaken” in the Tuesday, July 6 edition of The Irish Times, he responds to an estate planning query as follows: “when your father dies, any shares (or other assets) he owns will form part of the estate and they will be valued at whatever they are worth at that point. What he paid for them will be irrelevant at that point...to the estate and to anyone inheriting.” Am I wrong in thinking that while that is true of shares and property, it is not true of all other assets, as he parenthetically suggests, since unit-linked funds and ETFs, which are taxed on a gross roll-up basis, are subject to a 41% exit tax on the death of the owner, which is deducted from his or her estate before any additional capital acquisitions tax that may apply is imposed on the beneficiaries?

So, for example, if someone were to leave an investment property (or shares of stock) for which they paid €250,000, but which had since doubled in value to €500,000 to their child, then—assuming that they inherited nothing else—the child would owe capital acquisitions tax of (€500,000 – €335,000) x 33% = €54,450, and would receive a net inheritance of €500,000 – €54,450 = €445,550.

But if someone were to leave their child ETF shares for which they paid €250,000 less than eight years ago, so that no deemed disposal tax had been paid, but which had since doubled in value to €500,000, then the estate would owe exit tax of (€500,000 – €250,000) x 41% = €102,500, and—again, if they inherited nothing else—the child would receive a gross inheritance of €500,000 – €102,500 = €397,500, on which they would then owe capital acquisitions tax of (€397,500 – €335,000) x 33% = €20,625, and so would receive a net inheritance of €397,500 – €20,625 = €376,875, or €68,675 less than in the first case.

However, some online sources appear to suggest that exit tax paid on UCITS ETFs can be offset as a credit against any capital acquisitions tax that may be owed by the beneficiary or beneficiaries of an estate, so that in the second case above, where the exit tax is greater than the CAT, there would effectively be no additional CAT owed after the exit tax had been paid by the estate, and the child would receive a higher net inheritance of €397,500, albeit still €48,050 less than in the first case.

Can anyone confirm—by way of reference to relevant documentation from Revenue—whether this is correct? Revenue’s recent guidance on ETF taxation has been confusing (to me at least), and the tax and duty manual on exchange-traded funds in the Tax Professionals section of their website is “currently unavailable as it is being updated.”
 

Marc

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In Dominic Coyle’s article, “Selling shares to avoid capital gains tax after you die is mistaken” in the Tuesday, July 6 edition of The Irish Times, he responds to an estate planning query as follows: “when your father dies, any shares (or other assets) he owns will form part of the estate and they will be valued at whatever they are worth at that point. What he paid for them will be irrelevant at that point...to the estate and to anyone inheriting.” Am I wrong in thinking that while that is true of shares and property, it is not true of all other assets, as he parenthetically suggests, since unit-linked funds and ETFs, which are taxed on a gross roll-up basis, are subject to a 41% exit tax on the death of the owner, which is deducted from his or her estate before any additional capital acquisitions tax that may apply is imposed on the beneficiaries?

So, for example, if someone were to leave an investment property (or shares of stock) for which they paid €250,000, but which had since doubled in value to €500,000 to their child, then—assuming that they inherited nothing else—the child would owe capital acquisitions tax of (€500,000 – €335,000) x 33% = €54,450, and would receive a net inheritance of €500,000 – €54,450 = €445,550.

But if someone were to leave their child ETF shares for which they paid €250,000 less than eight years ago, so that no deemed disposal tax had been paid, but which had since doubled in value to €500,000, then the estate would owe exit tax of (€500,000 – €250,000) x 41% = €102,500, and—again, if they inherited nothing else—the child would receive a gross inheritance of €500,000 – €102,500 = €397,500, on which they would then owe capital acquisitions tax of (€397,500 – €335,000) x 33% = €20,625, and so would receive a net inheritance of €397,500 – €20,625 = €376,875, or €68,675 less than in the first case.

However, some online sources appear to suggest that exit tax paid on UCITS ETFs can be offset as a credit against any capital acquisitions tax that may be owed by the beneficiary or beneficiaries of an estate, so that in the second case above, where the exit tax is greater than the CAT, there would effectively be no additional CAT owed after the exit tax had been paid by the estate, and the child would receive a higher net inheritance of €397,500, albeit still €48,050 less than in the first case.

Can anyone confirm—by way of reference to relevant documentation from Revenue—whether this is correct? Revenue’s recent guidance on ETF taxation has been confusing (to me at least), and the tax and duty manual on exchange-traded funds in the Tax Professionals section of their website is “currently unavailable as it is being updated.”
The main risk I see here is where a fund subject to gross roll up or exit tax is left to a spouse or civil partner which is a no tax event so nothing to credit against the exit tax and then this is subsequently left or gifted to a taxable class of beneficiary for which CAT is due with no credit for the exit tax paid.
 

Investor

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The main risk I see here is where a fund subject to gross roll up or exit tax is left to a spouse or civil partner which is a no tax event so nothing to credit against the exit tax and then this is subsequently left or gifted to a taxable class of beneficiary for which CAT is due with no credit for the exit tax paid

Thanks for your reply, Marc. I appreciate that in many cases, there will be no CAT owed, so that passing appreciated shares of directly owned stock to an heir would be more tax efficient than passing appreciated ETF shares.

But is it true that exit tax paid by an estate on UCITS ETFs can be taken as a credit against capital acquisitions tax owed by the beneficiary?

If it were true, then passing ETFs would sometimes be more tax efficient, as the following table shows, assuming that I haven't made any mistakes, which makes me suspect that it may not be…

SharesETF
Beginning Value€ 500,000Beginning Value€ 500,000
Gain€ 500,000Gain€ 500,000
Ending Value€ 1,000,000Ending Value€ 1,000,000
CGT Levied @ 33%€ -Exit Tax Levied @ 41%€ 205,000
Gross Inheritance€ 1,000,000Gross Inheritance€ 795,000
Group A CAT Threshold€ 335,000Group A CAT Threshold€ 335,000
Taxable Amount€ 665,000Taxable Amount€ 460,000
CAT Levied @ 33%€ 219,450CAT Levied @ 33%€ 151,800
Tax Credit€ -Exit Tax Credit€ 151,800
Net Inheritance€ 780,550Net Inheritance€ 795,000
Extra€ 14,450
 
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