Is the 41% Exit Tax Soon to be Scrapped? Michael McGrath to Review

[joe sod]

All the same, there can never be a situation where income is allowed to roll up gross indefinitely and the life companies will never accept deemed distribution.

The life insurance obstacle seems to be unique to Ireland because nobody else is using this to impose deemed disposal on exchange traded funds, the whole point of which is to make them as easily traded as shares.The "deemed disposal" solution is like bashing the sides of a car to make it fit in through a narrow garage door rather than making the door bigger. The garage door is the problem not the car because that car fits perfectly well into every other garage

In any case the narrative that these funds could be rolled up for decades and even generations without paying any tax is the ultimate extreme.Many funds came a cropper during the financial crash and were liquidated at a loss. There are not too many funds in the Irish financial space that have been trundling on for decades steadily rolling up into millions of euros sadly.
Those investments that fit this criteria like investment trusts (almost all have dividends that are taxed) and the ultimate generational investment like Berkshire Hathaway in the US are outside the deemed disposal regime anyway. These are attracting Irish investment euros now precisely because of the deemed disposal regime.
Therefore this is a stupid taxation policy that doesn't work and is actually unenforceable

 

[Duke of Marmalade]

The life insurance obstacle seems to be unique to Ireland because nobody else is using this to impose deemed disposal on exchange traded funds, the whole point of which is to make them as easily traded as shares.The "deemed disposal" solution is like bashing the sides of a car to make it fit in through a narrow garage door rather than making the door bigger. The garage door is the problem not the car because that car fits perfectly well into every other garage

My understanding is that "accumulator" ETFs are generally taxed on some form of deemed distribution. Are you aware of any country where collective investments can roll up interest gross and remain untaxed until eventual realisation?
If the life insurance situation is unique to Ireland it is because it uniquely shields the punter from any tax compliance issues. For example in the UK I think they have what are called chargeable events which make higher rate tax payers pay the difference between their marginal rate and the standard rate paid internally by the life companies.
But your garage analogy is apt. Yes by increasing the Exit Tax rate from 23% to 41% over its 20 year life they have made it that those big foreign cars just don't fit in. The problem is not the Exit Tax regime but the ludicrous 41% tax rate and also the more minor issue that losses can't be used as offset.
There was a time when this parish was quite awash with those extolling the tax regime pertaining to ETFs vs Exit Tax. The Revenue solution to levelling that playing field was to insist the ETFs fitted into the garage. The correct approach was to reduce the Exit Tax rate to a level where it was not so beneficial to seek the alternative tax regime.

In any case the narrative that these funds could be rolled up for decades and even generations without paying any tax is the ultimate extreme.Many funds came a cropper during the financial crash and were liquidated at a loss. There are not too many funds in the Irish financial space that have been trundling on for decades steadily rolling up into millions of euros sadly.

I am unaware of any life company or funds that have failed in Ireland. That stockbroker was safe in encouraging her clients to put a "life belt around them" that would be indefinite.

Those investments that fit this criteria like investment trusts (almost all have dividends that are taxed)

Absolutely.

 

[basilbrush]

This thread is perhaps veering into "great financial debates" territory, but I will add a thought which is that the idea that we need the current system to prevent generational avoidance of CGT feels like punishing everyone to make sure that a tiny minority do not get ahead of anyone else. I know that is a concept that fits well with Irish society, but I don't think it is a good rationale for a tax system.

Some have suggested that what should happen is that the system of ETF taxation should be reformed to be less burdensome, but that the wealth tax element of it should be retained and expanded to all assets so that ETFs (and other funds) are no longer unfairly taxed compared to shares because shares will also have a wealth tax. I understand the arguments for wealth taxes, but I also understand the arguments against wealth taxes, and do not think that we should volunteer ourselves as the country to experiment with such a large change so that everyone else can see whether it works or not.

 

[AJAM]

the current system to prevent generational avoidance of CGT feels like punishing everyone to make sure that a tiny minority do not get ahead of anyone else. I know that is a concept that fits well with Irish society, but I don't think it is a good rationale for a tax system.

100% Agree

do not think that we should volunteer ourselves as the country to experiment with such a large change so that everyone else can see whether it works or not.

100% Agree

 

[basilbrush]

(Deleted)

 

[smarts]

The public consultation on funds has been launched so all of you that have strong opinions on fund taxation please submit them! I've posted the various links here:

Gov Consultation on Funds Sector

The Minister for Finance Michael McGrath TD, today (22 June) published a public consultation document as part of a review of Ireland’s funds sector entitled, “Funds Sector 2030: A Framework for Open, Resilient & Developing Markets”...

www.askaboutmoney.com

 

[basilbrush]

It sounds hopeful. They seem to want what I think most of us want: a simpler system, with similar taxation for all income so people can choose the most appropriate product for them rather than being influenced by how it is taxed. As they note, there are difficult questions about how to implement this, but hopefully a sensible solution can be found. With a closing date in September, I also hope that maybe there is a chance we might see some changes announced in this year's budget. Like @smarts, I encourage everyone to make a submission.

 

[Duke of Marmalade]

It sounds hopeful. They seem to want what I think most of us want: a simpler system, with similar taxation for all income so people can choose the most appropriate product for them rather than being influenced by how it is taxed.

Yes, the Commission on Tax and Welfare recommends what they call "horizontal equity" which I think means tax shouldn't be a deciding factor in choosing an investment product/approach. They also recommend that all products should be taxed on a progressive basis with people on higher incomes being subject to higher marginal rates of tax. I am not sure that the life industry would welcome that, though it is the situation in the UK and I presume in most countries.
I think the life industry would be happier with the retention of the Exit Tax system but with the rate brought back to DIRT + 3% as originally conceived.
The consultations set out a lot of details on taxation of products/investments but they leave out the life insurance 1% levy, presumably because it is not a tax but then they do mention PRSI which isn't a tax either.

 

[AJAM]

I would encourage all of you to respond and express your support for scrapping the exit tax, and replacing it with CGT.
Section 5 Question 27 "Are there places where the taxation of investment income and gains need to be simplified or modernised? For example, in relation to the taxation of ETFs, the old basis of taxation for life products, or harmonising the exemptions from IUT and LAET."

The more people that complain the more likely we get rid of it.

 

[Duke of Marmalade]

I would encourage all of you to respond and express your support for scrapping the exit tax, and replacing it with CGT.

I agree that the exit tax regime is silly for the likes of ETFs. The tail wagging the dog are life assurance products. My guess is that the life industry do not want a CGT/IT treatment as the LAET has many advantages for the retail market. But the 41% rate is penal, clearly higher than CGT/IT especially for standard rate taxpayers. The Exit Tax rate started life as DIRT + 3%, then 23% and 20% respectively. The +3% was to level the advantage of gross roll-up. When Deemed Disposal was introduced the 3% was not reduced even though the benefits of gross roll-up were now reduced to 8 years.
In the crisis both DIRT and Exit Tax rates went to 41% which was I suppose unfair relatively speaking on DIRT. But since then DIRT has fallen back to 33% but inexplicably the Exit Tax rate has been kept at the 41% emergency levels and a 1% levy has been applied to boot!
The below Table shows the equivalence between a DIRT rate of 33% and an 8 year roll-up Exit Tax rate, varying as it does with the assumed deposit rate. If I make a submission I will be asking for a 35% DIRT rate to be applied and for the levy to be abolished.

As I have noted before this penal 41% rate coincided with booming markets and it seems that substantial amounts of Exit Tax on Deemed Disposals were collected. A reduction on the rate would then retrospectively return this excess Exit Tax collection. This together with the recommendation that any changes should be revenue neutral will be a hurdle to overcome.

 

[GSheehy]

Life Assurance Exit Tax receipts from 2014 to 2022 are here , along with DIRT receipts

The 1% Levy is a charge by the Government and is adding circa 0.15% pa to your TER. A previous DoF 'report' on LAET V DIRT made much of the charges/costs of UL savings/investments and no mention that they were adding to those charges/costs themselves.

Life Assurance Exit Tax isn't self-assessed so I honestly think that there should be some acknowledgement of this via a much lower rate than it's currently at. The customer is paying for this via increased costs to product providers which is, again, a Government added cost.

Life Assurance product providers (and possibly policymakers) wouldn't have a leg to stand on in arguing against a progressive tax regime via higher incomes/higher taxes because (I think) DoF/Revenue would beat them to a pulp with the 40% tax relief on pensions stick. Their primary focus is on the the 1% Levy because that's (now) technically a cost to them via 101% allocations.

It's mainly intermediaries that are fighting the 41% rate on the grounds of its fairness and the uncertainty of its level. Government 'Yes the cost of education is spiralling out of control' Concerned parent 'Oh, I'd better do a long term saving plan to provide for that eventuality' Goverment '41% tax on the growth. Thank You' .

I have no idea why LAET needs to be 'linked' to DIRT, at all.

Gerard

www.bond.ie

 

[joe sod]

The genie is out of the bottle now anyway as alot more people are investing themselves rather than through fund houses that collect the tax automatically. Therefore the thinking that by keeping the exit tax system it would frighten people away from investing themselves and reduce the burden on revenue having to process alot more self assessed tax returns from individual investors doesn't work anymore.
Yes ireland has alot less people investing in the markets directly than our international colleagues but that is changing. Therefore revenue need to recognize reality and simplify the tax system for investments thereby increasing the tax compliance of all those self assessed returns. Anecdotally revenue officials themselves don't understand the exit tax rules with conflicting advice given depending on who you get on the phone .
It simply a case of recognising reality ETFs can be bought and sold like shares ,therefore trying to differentiate between ETF and shares for taxation purposes is just silly at this stage in the year 2023, it's not 1993

 

[Duke of Marmalade]

Life Assurance Exit Tax receipts from 2014 to 2022 are here , along with DIRT receipts

The 1% Levy is a charge by the Government and is adding circa 0.15% pa to your TER. A previous DoF 'report' on LAET V DIRT made much of the charges/costs of UL savings/investments and no mention that they were adding to those charges/costs themselves.

Life Assurance Exit Tax isn't self-assessed so I honestly think that there should be some acknowledgement of this via a much lower rate than it's currently at. The customer is paying for this via increased costs to product providers which is, again, a Government added cost.

Life Assurance product providers (and possibly policymakers) wouldn't have a leg to stand on in arguing against a progressive tax regime via higher incomes/higher taxes because (I think) DoF/Revenue would beat them to a pulp with the 40% tax relief on pensions stick. Their primary focus is on the the 1% Levy because that's (now) technically a cost to them via 101% allocations.

It's mainly intermediaries that are fighting the 41% rate on the grounds of its fairness and the uncertainty of its level. Government 'Yes the cost of education is spiralling out of control' Concerned parent 'Oh, I'd better do a long term saving plan to provide for that eventuality' Goverment '41% tax on the growth. Thank You' .

I have no idea why LAET needs to be 'linked' to DIRT, at all.

Gerard

www.bond.ie

I reckon that dropping the rate from 41% to 35% could be giving back about €200m.
Good point about LAET vs DIRT. At the time of the negotiations life companies were pretty big into guaranteed bonds and these were in direct competition with deposits. Much less relevant in recent times of course with the negligible interest rates.

 

[GSheehy]

Good point about LAET vs DIRT. At the time of the negotiations life companies were pretty big into guaranteed bonds and these were in direct competition with deposits.

I'd have no issue whatsoever if structured deposits had a special place in tax hell.

 

[Duke of Marmalade]

I'd have no issue whatsoever if structured deposits had a special place in tax hell.

By structured products I presume you mean the variety we saw during the zero interest rate period, and I agree with you. But in the 80s and 90s GGBs (Guaranteed Growth Bonds) were all the rage offering up to 9% net p.a. guaranteed and backed by honest to goodness government bonds. The low interest rate environment has forced the life industry onto its natural habitat and I don' t think they indulged big time in structured products. That became a speciality of some niche players, usually backed by a big international bank like Soc Gen or Paribas (yes structured products were/are BIG in France).

 

[Duke of Marmalade]

I think the life industry will be very anxious to prevent their products being subject to progressive taxation. Besides losing a big attraction to higher rate taxpayers* it would be a very retrograde development if it led to self assessment.
* of course this attraction has been neutralised by the emergency 41% rate, but that is surely going to be addressed.

 

[jpd]

My gut feeling is that they are going to bring in some new rule that will make a complex tax situation even more complex

 

[daheff]

My gut feeling is that they are going to bring in some new rule that will make a complex tax situation even more complex

and more expensive!

 

[smarts]

and more expensive!

My gut feeling is that they are going to bring in some new rule that will make a complex tax situation even more complex

All the more reason to submit your thoughts! Its quite straightforward to make a submission.

 

[AJAM]

I reckon that dropping the rate from 41% to 35% could be giving back about €200m.

From the revenue figures Exit tax in it's best year ever (2022) only took in €233m. On average it's taking in ~135m, so there is no chance of them losing 200m. Over the longer term the extra tax that Exit tax brings in is minuscule, because the capital gain is actually lower because of the 8 year rule. I honestly believe that Revenue will actually take in more money by switching to CGT as it will encourage more people to invest in ETF's.

Since 2017 Exit Tax has risen 27% to €233m.
While Capital Gains Tax has risen 112% to €1,747m . This is clear evidence that people are voting with their feet and avoiding Exit tax.