Key Post Strategy around the 8 year deemed disposal

Brendan Burgess

Brendan Burgess

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I have no practical experience of this and I have recently been asked about it.

(It's a mad system but this is not a thread for letting off steam about it.)

First to clarify how it works.

I bought a unit-linked fund for €100k 8 years ago.
Today, it's worth €140k.
The fund deducts 41% tax €16,400 and the net amount falls to €123,600

I cash it in two years when it's worth €143,600
I presume I pay 41% exit tax on the €20,000 gain since the 8 year deemed disposal?

What happens if it falls to €103,600
Do I get a refund of 41% of the €20k fall in value?
 
Are there any strategic points around this to look out for?

If I am coming up to the 8 years, should I exit it myself and reinvest? I presume not as I would face the 1% stamp duty on reinvesting and lose any potential refund from a subsequent fall.

If I am coming up to the 8 years and planning on cashing it anyway to use the money for something else, is there any advantage in exiting it early?
 
Is this previous post (and maybe the few preceding it that triggered it) of any use here? I was originally under the impression that exit tax didn't really have any bearing on the timing of (re)investment/encashment decisions but maybe I was wrong?

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Brendan Burgess said:
I cash it in two years when it's worth €143,600
I presume I pay 41% exit tax on the €20,000 gain since the 8 year deemed disposal?
Click to expand...

Tax is paid on the difference between acquisition cost and disposal, rather than between disposal and 'deemed disposal'.

The original cost of acquisition should be used in carrying out the calculation of the taxable gain in such circumstances i.e. where the disposal occurs after the deemed disposal.
Click to expand...

I would think the tax calc on disposal is: (143600 - 100000)*41% - 16400 = 1476 or (103600 - 100000)*41% - 16400 = (14924) i.e. refund.

As the quantity of you units will change, due the tax being paid, you need to keep a record of your originally purchased units and value.
 
Itchy said:
As the quantity of you units will change, due the tax being paid, you need to keep a record of your originally purchased units and value.
Click to expand...

Surely all this is done by the life company? (Of course, you should have the information to check it.)

Brendan
 
I noticed that my recent deemed disposal on an investment involved a refund/credit. I'll see if I can dig out the numbers. As far as I recall it was its second 8 year deemed disposal.
 
ClubMan said:
Is this previous post (and maybe the few preceding it that triggered it) of any use here?
Click to expand...

Not really.

This thread is about 8 year deemed disposal so it's implied that there is a gain in the fund on which the 41% tax is paid.

If the fund is worth less at 8 years than the amount originally invested, then there is no deemed disposal - I assume.

Ger pointed out that you probably should not exit a fund at a loss to reinvest in another fund, because you lose the benefit of that loss. But pick that up in the other thread, and not this one.

Brendan
 
Brendan Burgess said:
Ah, so they do the calculation from the start.

€3,600 gain at 41% = €1,476 exit tax payable.

Less €16,400 deemed disposal tax
= €14,924 refund.

That makes sense.
Click to expand...

What happens if you are due a refund on 'deemed disposal'? Are these reinvested in the fund?
 
Brendan Burgess said:
If the fund is worth less at 8 years than the amount originally invested, then there is no deemed disposal - I assume.
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My latest Irish Life letter says:
3. How is my tax calculated?

Tax is payable at a rate of 41% on any profits made on your plan. This profit is calculated by comparing your initial investment (allowing for any withdrawals) with the current value of your plan.

On second and subsequent exit tax events, we will take into account any previous exit tax deducted. If your
plan has not made any profit, no tax is due.
Click to expand...
 
Itchy said:
I would think the tax calc on disposal is: (143600 - 100000)*41% - 16400 = 1476 or (103600 - 100000)*41% - 16400 = (14924) i.e. refund.

As the quantity of you units will change, due the tax being paid, you need to keep a record of your originally purchased units and value.
Click to expand...

€100,000 isn't the acquisition cost of the final disposal, since units were sold to pay the tax. The gain is calculated on the acquisition cost of the remaining units only.

Year 0: buy 1,000 units at €100 each = €100,000

Year 8: 1,000 units at €140 each = €140,000
Gain = 1,000 * (140-100) = €40,000
Tax = €40,000 * 41% = €16,400
Sell 117 units at €140 each = €16,400
Remaining = 1,000 - 117 = 883 units at €140 each = €123,600

Case 1
Year 10: €143,600 = 883 units at €162.65 each
Gain = 883 * (162.65-100) = €55,314
Tax = €55,314 * 41% = €22,679
Credit for tax already paid in year 8 = (883/1,000) * €16,400 = €14,479
Amount to pay = €22,679 - €14,479 = €8,200

Case 2
Year 10: €103,600 = 883 units at €117.35 each
Gain = 883 * (117.35-100) = €15,314
Tax = €15,314 * 41% = €6,279
Credit for tax already paid in year 8 = (883/1,000) * €16,400 = €14,479
Amount to pay = €6,279 - €14,479 = -€8,200, i.e. a refund
 
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ClubMan said:
Seems to, but I'm sure that I saw a refund/credit.
I'll have a proper look when I'm off mobile and back on the computer...
Click to expand...
I misread my statement and don't have an example of a tax refund/credit after all. Sorry about that!
 
If have ETF subject to Exit tax - some of them have been held for 20 years now

When I queried the tax on 2nd and subsequent deemed disposals with Revenue via My Enquiries, they replied saying that subsequent deemed disposals are based on the gain since the previous deemed disposal and not on the gain since the original purchase

I think this information is incorrect, but that's what they said in writing, via My Enquiry - so official, sort of

I presume that the final disposal will be calculated using the original cost with credits for all taxes paid on deemed disposal in the meantime.

It is a complete mess with no clear information or examples anywhere from Revenue

I presume that Life companies and fund companies can back up their calculations and show the workings in a statement
 
Coronet said:
€100,000 isn't the acquisition cost of the final disposal, since units were sold to pay the tax. The gain is calculated on the acquisition cost of the remaining units only.

Year 0: buy 1,000 units at €100 each = €100,000

Year 8: 1,000 units at €140 each = €140,000
Gain = 1,000 * (140-100) = €40,000
Tax = €40,000 * 41% = €16,400
Sell 117 units at €140 each = €16,400
Remaining = 1,000 - 117 = 883 units at €140 each = €123,600

Case 1
Year 10: €143,600 = 883 units at €162.65 each
Gain = 883 * (162.65-100) = €55,314
Tax = €55,314 * 41% = €22,679
Credit for tax already paid in year 8 = (883/1,000) * €16,400 = €14,479
Amount to pay = €22,679 - €14,479 = €8,200

Case 2
Year 10: €103,600 = 883 units at €117.35 each
Gain = 883 * (117.35-100) = €15,314
Tax = €15,314 * 41% = €6,279
Credit for tax already paid in year 8 = (883/1,000) * €16,400 = €14,479
Amount to pay = €6,279 - €14,479 = -€8,200, i.e. a refund
Click to expand...

I think you have to pay tax on the units disposed of, to get the money to pay the tax - but if you sell them at the same price as the deemed disposal, thewn there is no extra tax due
 
jpd said:
When I queried the tax on 2nd and subsequent deemed disposals with Revenue via My Enquiries, they replied saying that subsequent deemed disposals are based on the gain since the previous deemed disposal and not on the gain since the original purchase

I think this information is incorrect, but that's what they said in writing, via My Enquiry - so official, sort of
Click to expand...
Seems incorrect to me too.
I've been given incorrect info by Revenue too in the past.
jpd said:
I presume that the final disposal will be calculated using the original cost with credits for all taxes paid on deemed disposal in the meantime.
Click to expand...
That's what it seems from this thread alright.
jpd said:
I presume that Life companies and fund companies can back up their calculations and show the workings in a statement
Click to expand...
In my experience they don't as a matter of course in the letters that they send out. Maybe one can ask them. I haven't bothered, myself.
 
jpd said:
When I queried the tax on 2nd and subsequent deemed disposals with Revenue via My Enquiries, they replied saying that subsequent deemed disposals are based on the gain since the previous deemed disposal and not on the gain since the original purchase
Click to expand...
In effect the calculation is the same as just paying tax on the gain between the deemed disposal and the subsquent disposal, the +20k or -20k from the first post at 41% is still +/- €8,200 of tax.

jpd said:
I think you have to pay tax on the units disposed of, to get the money to pay the tax - but if you sell them at the same price as the deemed disposal, thewn there is no extra tax due
Click to expand...
That's a good point, the price could be very different when the first real disposal is made to pay for the first deemed disposal, especially for an ETF where you wouldn't have to pay the tax until the year following the deemed disposal. Presumably with a unit-linked fund there wouldn't be much delay.
 
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