The Roadmap for Deemed Disposal

[TomEdison]

I want to avoid macho competition with @TomEdison.

Good. If there is a macho competition between me and the Duke, I will not be the winner.

But in fact I don't think there's much difference between us. Both actively and passively managed funds do the same things — they buy and sell shares, they enter into transactions involving derivative and synthetic instruments. They adopt different strategies in doing so, seeking different outcomes, but this doesn't change the nature of the various transactions they enter into.

Do you not think this discussion has run its course?

I came in in response to the suggestion that actively and passively managed funds should be taxed differently. My point is that they enter into the same kinds of transactions and, therefore, whatever the tax treatment of managed funds should be, it should be the same for both actively and passively managed funds.

I found that dividends were taxed at the marginal rate, subject to prsi and usc at 8%, effectively a 52+ % tax on any dividend. That’s totally unfair when I am taking the risk.

I've never understood this argument. The asset itself should reward you for taking the risk by offering the prospect of a higher return. The reward for the downside risk is the upside risk. If that is not a sufficient reward for you, it is not rational to buy the asset; buy an asset that has the risk profile that you want.

But, if you do buy it, don't look to the taxpayer to reduce the risk for you by taxing the return at lower rates than other forms of income are taxed. No argument from "fairness" requires this.

 

[Greenbook]

Do you not think this discussion has run its course?

Yes, I think it has.

I am quite clear now how passive index trackers work and that the real tax issue is that the EU ones especially reinvest the dividends. If you invest in an ETF tracking high yield shares, for example, that is a very good tax break. The general approach abroad, deem the investor to have received the dividends, seems the better one. DD is a bit of a sledge hammer for a passive tracker.

Thank you very much @Duke of Marmalade, I've learned a huge amount on how these things work and the thinking behind the DD.

 

[joe sod]

want to avoid macho competition with @TomEdison

I doubt debates on this site enter into the machismo territory more the anorak territory, myself included . I doubt the conor mcgregors are sparring on these posts.
If they were i doubt the establishment here would have gotten away with deemed disposal. We have no big trucks and tractors to change that policy.

 

[jpd]

The note on taxation may be of interest

 

[boomshine]

I did calculate it before and think it was somewhere around 17-20% DD8 where I’d be willing to consider ETFs over UK investment trusts.

Have you posted your calculations on this forum before? I am curious to see it.

 

[Zion2022]

Have you posted your calculations on this forum before? I am curious to see

Don’t think so but can be done pretty quickly in excel (and all the AI models will get it right first time these days). Needs a whole host of assumptions but as an example for my personal circumstance:

Initial investment: €100,000 (smaller sums are more beneficial for CGT as value of annual exemption is more impactful)
Annual return on ETF (net fees): 8%
Annual capital return UK Itrust: 6.75% (drop .25% for higher fees than passive ETF)
Annual yield on dividend UK trust: 1%
UK stamps duty on IT investment: 0.5%
Tax rate on dividend: 20% (my wife doesn’t work so I can put in her name, not massively impactful given low dividend rates these days)
Time horizon: 30 years (my time to retirement)
Annual CGT exemption value: €420 less stamp duty incurred to realise €50. Net value €370 PA

After 30 years.

Initial 99,500 (100k less stamp) is worth 706k, less 190k CGT. €516k
€72k net income tax dividend reinvested worth €182k less than€36k CGT = €145k

Net value at year 30: €660k

€100k in accumulating ETF at 8% subject to DD8 @38% is worth €486k at year 30.

Exit tax would need to drop to c.23% to match the final €660k.

Then there are two further points against DD8
1. It’s a pain to report for monthly investing
2. The inability to offset gains and losses for monthly investing is a real risk which doesn’t show up in mean analysis but makes negative tail outcomes much worse.

So as long as DD8 > 20% ish. Not interested for now!

In theory, as I get older - my time horizon shrinks and DD8 becomes relatively more attractive. But conversely, as I get older - the extinction of CGT on death may also be a consideration.

 

[Protocol]

A landlord can own a rental property, and the value climbs over 20-30-40 years, and that gain is not taxed until disposal, or until possible CAT paid by heirs.

Why are lifeco funds and EFTS treated differently?

 

[balders93]

Why are lifeco funds and EFTS treated differently?

the landlord is taxed on the rental income along the way

 

[boomshine]

Annual return on ETF (net fees): 8%
Annual capital return UK Itrust: 6.75% (drop .25% for higher fees than passive ETF)
Annual yield on dividend UK trust: 1%
UK stamps duty on IT investment: 0.5%
Tax rate on dividend: 20%

Thanks for laying it out. Note that I own both ETFs (since the 2026 rate change) and Trusts so this is more curiosity on my part.
In my case I have tweaked your numbers - Div Yield down to 0.476% as I am a high earner, I also already use the CGT exemption due to earning RSUs so I don't count that at all when comparing both ETFs vs Trusts. I also tweaked your 0.25% expense difference upwards as IMO that's a bit generous, f.ex. LSE JAM charges 0.35%, vs some ETF providers only 0.03% TER for the SP500, hence increased to 0.32%. (f.ex. ATT and PCT both have much higher expenses of 0.6-0.7% range or so.)

At those figures, ETFs are slightly ahead in a 5 year timeframe, breakeven between both approaches around 10 year timeframe, but yes still ETFs fall behind after the second and third disposals with gemini Math saying 29-30% DD tax rate would make them equal over 30 year timeframes. I would argue that if someone is doing the busy work of reinvesting dividends each quarter/year and filing/paying taxes for them etc, it's not a big difference to tracking your purchases of ETFs somewhere each year and doing it once in year 8 IMHO.

 

[Celtik]

Any theories why deemed disposal has not been 'disposed' of yet? Is there a fear of a run on bank deposits that will cascade to ETFs?

 

[Fortune]

Any theories why deemed disposal has not been 'disposed' of yet?

They don't know how much tax it brings in. IUT just gets thrown into the tax returns without deemed disposal being split out, and the same with LAET returns not splitting it between deemed disposal and actual disposals. They probably don't want to risk turning off a potentially larger than anticipated tax revenue source

 

[Connard]

Any theories why deemed disposal has not been 'disposed' of yet? Is there a fear of a run on bank deposits that will cascade to ETFs?

They do seem like they are getting rid of it but like everything the government does, they will do it slowly. They dropped it by a few percent last year. The probably would do the same this year if it wasn't for the new investment account coming in. The investment account is already been seen as a tax break for the rich so I assume that is why they held off on touching the tax rate for deemed disposal this year (maybe they still will, we will see on budget day).

I think they will reduce the tax rate a couple of times and then just get rid of it and have ETFs come under CGT.

 

[Duke of Marmalade]

I think they will reduce the tax rate a couple of times and then just get rid of it and have ETFs come under CGT.

That would lead to an internecine war between Distributor and Accumulator ETFs.

 

[CharlieMac]

At those figures, ETFs are slightly ahead in a 5 year timeframe, breakeven between both approaches around 10 year timeframe, but yes still ETFs fall behind after the second and third disposals with gemini Math saying 29-30% DD tax rate would make them equal over 30 year timeframes. I would argue that if someone is doing the busy work of reinvesting dividends each quarter/year and filing/paying taxes for them etc, it's not a big difference to tracking your purchases of ETFs somewhere each year and doing it once in year 8 IMHO.

I also think the hassle of the ETF reporting requirements is over-stated. It's not convenient but if I get access to a long term money making machine then I can figure it out. Compared with UK Investment Trusts ETFs have significantly lower fees and show greater capital growth.

Deemed Disposal does kinda ruin it, for all the reasons that have been discussed ad-nauseam. I encourage newcomers to this thread to read the excellent recent posts in this thread from Duke of Marmalade, Greenbook and TomEdison.

 

[joe sod]

That would lead to an internecine war between Distributor and Accumulator ETFs.

then keep it for accumulator ETFs or have the deemed dividends like you were saying for those Accumulator ETFs. However that means those investors then have to submit a tax return every year like other shareholders. You were saying before that is probably the real reason for DD to discourage people investing in ETFs altogether and swooshing those investors into the arms of the fund companies who do the tax returns for them but at a high cost.

 

[Zion2022]

Agree with everything you’ve said and clearly the CGT vs Exit Tax is a very different proposition for everyone depending on their individual circumstances. Once time horizons extend out long enough (20+ years). Most Irish people are better off in F&C Investment Trust (closest to passive I’ve found) than VWCE or whatever the lowest fee ETF is today…which is obviously madness but such is DD8.

I am a high earner, I also already use the CGT exemption due to earning RSUs so I don't count that at all

Just on this, I’m similar but often households may have 1 spouse not in higher bracket or getting RSUs which helpful to move across into their name for IT & CGT.
Also, thankfully everything has only been going up for 15 years or so. But if you were ever to be in a situation where either:
Your RSUs went up, but wider stock market went down
Or
Your RSUs went down but wider stock market went up. You’d be very happy both were on CGT so you could offset them! Lack of loss relief on ETFs will get a lot more attention in the next major downturn.

 

[Duke of Marmalade]

then keep it for accumulator ETFs or have the deemed dividends like you were saying for those Accumulator ETFs.

Yes that is the obvious solution

You were saying before that is probably the real reason for DD to discourage people investing in ETFs altogether

Not to discourage but to set a level playing field. Of course ETFs will always be the better offering for those with an unreliable memory.

 

[Corola]

That would lead to an internecine war between Distributor and Accumulator ETFs.

Would it be a problem if one was objectively better? The providers offer both accumulating and distributing versions of their funds, they aren't in competition with each other.

In different countries one type is usually more tax efficient than the other.

 

[joe sod]

https://www.independent.ie/business/irish-business/everyone-accepts-its-a-problem-simon-harriss-failure-to-scrap-deemed-disposal-tax-risks-our-credibility-as-funds-hub-says-insider/a/160927341.html

Very welcome article from funds industry on the need to abolish deemed disposal quickly and its continued existence is eroding ireland's credibility as a major hub for international finance.

 

[Fortune]

existence is eroding ireland's credibility

This claim is eroding the author's credibility.