How to use the losses in a unit linked fund investment

Say I invested €20,000 in a unit-linked fund and it is now down to €10,000.

Any gain in value back up to €20,000 will just be a recovery of losses so there will be no tax on it.

But can I add say €50,000 to the same fund so that the first €10,000 of gains on the overall amount would be tax-free?

Brendan

No. Although you can add amounts to most unit-linked policies, the life assurance company will separate the original amount from the new €50,000 and treat them separately for tax purposes.

LDFerguson said:

No. Although you can add amounts to most unit-linked policies, the life assurance company will separate the original amount from the new €50,000 and treat them separately for tax purposes.

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That's not correct. In most cases the life assurance company can add the new amount to the existing policy, and there is a tax benefit for the investor if the policy increases in value.

To use the figures quoted, after the new money is invested, the value of the policy (ignoring charges) is €60,000. Assume that the investor encashes the policy at a value of €90,000 (i.e. the value has grown by 50% - this may have taken several years but the time doesn't matter much*). Then the tax will be calculated on an overall gain of the final value of €90,000 minus the total invested of €70,000, i.e. €20,000.

If the €50,000 had been invested in a separate policy which had gained 50%, then the taxable gain on this policy would be €75,000 - €50,000 = €25,000. The same 50% gain only brings the value of the first policy to €15,000, so there is still a loss, which can't be offset in this case.

So there is a definite tax advantage in adding to a policy where you have accumulated a loss.

*Things get more complicated if the policy is in force for more than 8 years and you have to take into account the tax payable at that time, but it shouldn't affect the main point.

I think that this is a very important point, which has been overlooked.

If you have losses in a unit-linked fund, you should consider investing further amounts in that fund, as any gains up the original contribution will be tax-free.

Brendan Burgess said:

If you have losses in a unit-linked fund, you should consider investing further amounts in that fund, as any gains up the original contribution will be tax-free.

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If you still have significant losses in an equity based fund at this stage of the game, the last thing you do is add to it!

Jim2007 said:

If you still have significant losses in an equity based fund at this stage of the game, the last thing you do is add to it!

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Depends.

If you stayed in equities consistently then you'd have to have very little faith in an investment manager that is not in gains territory at this moment in time.

If, however, you switched out of equities after the crash, you may still be nursing a loss. In this case, even if you are just going into a low risk / low return fund, you are still avoiding tax on your gains through Brendan's suggestion.

In any case, we don't know what the future holds, so it might be worth bearing this in mind for the next crash. If you simply cash in your policy, you lose any value of tax losses.

I would imagine that people in property funds, especially geared property funds, have big losses.

A fund invested in Irish equities at the peak, is still down considerably.

Are you sure about this? I didn't think there was relief allowed on losses on the initial capital investment. I would have agreed with Liam above but I might be wrong.

Yes, I am sure of it. That is how the life companies are doing it in practice. On maturity, they calculated the gain as the current value less the amounts invested.

Brendan