The Swedish equivalent of an ISA as a model for Ireland?

[Brendan Burgess]

The Swedish system is not "no tax on gains or income"

It's a 1% tax on the value of the fund, irrespective of the income, gains or losses.

So these reports make no sense.

 

[faketales]

If it’s only done through Davy and the banks with a 0.5%+ slice for them they may as well bin it before they start.

“Next Tuesday, Mr Harris will convene a Savings and Investment Forum - bringing together relevant industry and policy stakeholders to inform the process of establishing a new investment account.”

Will be interesting to see who is invited and who turns up. I can’t imagine the like of T212 would be too interested in putting resources into an Irish product.

If they require the financial institution to manage tax it will obviously turn some off.

I wonder if Revolut will be the best bet outside the traditional banks?

 

[Mez!]

It's a 1% tax on the value of the fund, irrespective of the income, gains or losses.

1% tax on amounts over the tax-free allowance.

 

[Brendan Burgess]

Mr Harris will convene a Savings and Investment Forum

I am disappointed that I was not invited. I did make a submission on behalf of investors generally. I can't think of any other way in which investors will be represented.

 

[joe sod]

am disappointed that I was not invited. I did make a submission and there won't be any other consumers or investors properly represented.

Who was invited do you know?

 

[Brendan Burgess]

Who was invited do you know?

Don't know. But it will be mainly industry.

If they want people to switch from deposits to investments, they will need consumer representatives.

 

[Raskolnikov]

It will be interesting to see the details but if we precisely follow the Swedish model, it won’t really be an advance on where we stand today.

I am disappointed we are not going down the ISA route, but even the ISK-type model would still be a significant improvement on what we have now.

Let's say you invest €10k in an equity ETF, it returns 8% for the year, that gives you €10,800 at the end of the year. If we apply a 1% tax on that, that's €108 of tax due.

€108 tax/€800 total gain is equivalent to a CGT tax rate of 13.5%, which is significantly better than the 38% exit tax on ETF's and even the regular 33% CGT rate. If part of the 8% return came from a dividend, it's even better again for higher rate income tax payers whose investment income would be taxed at the marginal rate.

The scheme also simplifies everything for both the consumer and the government. The consumer no longer has to track income received, the cost basis of positions, loss carryover, etc. You presumably will get a single tax bill on the amount in the account at the end of the year. It should also be a win from the perspective of the government and tax collection. They will have a more predictable stream of revenue whose complexity of collection will be very straight-forward (the onus will probably be on the provider to report on what an account is due at year end).

The only downsides? This scheme really only work for equity-type investments where you would expect a higher return. If you were to keep your money on deposit and earn 3%, once the government apply the 1% tax, your effective CGT rate is just over 33%.

 

[Zion2022]

€108 tax/€800 total gain is equivalent to a CGT tax rate of 13.5%, which is significantly better than the 38% exit tax on ETF's and even the regular 33% CGT rate. If part of the 8% return came from a dividend, it's even better again for higher rate income tax payers whose investment income would be taxed at the marginal rate.

8% is a fairly high long term assumption. Drop it to 6% and 1.2%/6% is a 20% tax taken annually vs 33% which can be deferred forever. Depending on timeline it becomes tighter which is better, especially when you factor in €1,270 annual tax harvesting in CGT.

The only downsides? This scheme really only work for equity-type investments where you would expect a higher return

I’d say this is being viewed as the primary upside of the Swedish scheme (alongside stable annual tax base). It encourages people to invest in higher risk assets which is one the main objectives of this entire thing.

 

[Setforlife]

The only downsides? This scheme really only work for equity-type investments where you would expect a higher return. If you were to keep your money on deposit and earn 3%, once the government apply the 1% tax, your effective CGT rate is just over 33%.

I agree with your post in general, but don’t see this as the big or only downside.

The big downside is that looking into deemed disposal and tax rate on funds and unit trackers v shares has fallen away to be replaced but this, which is being touted by Harris as a big win for consumers, but has actually morphed into a grab for extra tax revenue. Clearly revenue and dept of finance have won out on the argument of trying to get at the billions on deposit to be able to tax it consistently.

So it will be announced as all about the squeezed middle and getting returns for consumers and it will take a while for the penny to drop that if you move your savings in to it revenue will start taking a cut of the overall each and every year, no doubt you will also be expected to go through current providers so they can protect you with initial 5% commission, lock in periods and 1% trail commission for their advice that this is a great win for you.

 

[chatan]

Is there any specific reason to 'productise' this (forgive my lousy pun; I'm calling it the ShamRISK..) , can it not simply be a change to how investments in - say - shares are taxed, and put the onus on the tax payer to properly file returns? Or at least allow the latter to co-exist with a product? A 1% slice to the government is not insignificant; the prospect of an intermediary taking a further cut does not seem attractive.

 

[Zion2022]

can it not simply be a change to how investments in - say - shares are taxed

The argument will be that you cannot sufficiently target this.
They want to make investments more attractive to low and middle income earners (fully tax free up to a threshold)
Any generic improvements will see the benefit/lost tax revenue accrue almost entirely to those with very large funds. This won’t be politically acceptable.

 

[JamesBM]

DeGiro and Interactive Brokers both provide ISKs I believe. If the rules here align closely with those in Sweden hopefully that should allow them to be providers. I agree with earlier comments that anything approaching the usual level of fees that Irish based providers charge would likely be a killer for this product. It would also be fantastic if this was followed up by consideration of the introduction of a low cost SIPP type product here.

 

[Protocol]

(1) as taxes in general in Sweden are higher than here, then maybe our flat tax rate on the imputed income might be less ghan 30%?


(2) the size of the tax-free amount will be key, as I can see loads of people holding these accounts up to that limit.

Most people won't do the sums to compare returns inside and outside an Irish ISK, instead they will focus on the tax-free limit.

 

[Zion2022]

2) the size of the tax-free amount will be key, as I can see loads of people holding these accounts up to that limit.

Most people won't do the sums to compare returns inside and outside an Irish ISK, instead they will focus on the tax-free limit.

100% agree. And it’s for me the biggest downside to this structure. I’d have thought the government want to encourage regular monthly investing.

My bet with this scheme is you’ll get a huge percentage of people who drop €30k in the first day it opens and then never adding to it again.

Despite many being happy to pay Zurich or whoever 0.75% to ‘manage’ their money - Psychologically this is hidden with the fund return. People will be allergic to the 1-1.2% tax coming out, especially in years of negative returns. I’d suspect we will see an outsized proportion of funds at precisely the tax free limit.

 

[Zion2022]

as taxes in general in Sweden are higher than here, then maybe our flat tax rate on the imputed income might be less ghan 30%

I think Sweden has lower CGT than us? 30%? So I fear it will be higher here.

 

[faketales]

DeGiro and Interactive Brokers both provide ISKs I believe

Almost double our population though, I wonder do they have more of an investment culture I general?

 

[galway]

My bet with this scheme is you’ll get a huge percentage of people who drop €30k in the first day

I expect it will also get a huge amount of young people from all Income groups to start saving once the start working for the first time,

 

[skrooge]

think Sweden has lower CGT than us? 30%? So I fear it will be higher here.

It might be less about moving to a Swedish system and more about shoehorning a version of theirs into our system.

As I understand it -from a quick internet search - theirs no dirt in Sweden rather interest is taxed the same as Investment return. In an Irish context that might suggest a tax rate equivalent to dirt (33%)

 

[joe sod]

That 1% tax on everything should be fiercely resisted, thats worse than deemed disposal if you think about it. If they get away with bringing it in for this new investment account they will try to do it for other assets.
Then it becomes a trend where high net worth individuals start fleeing here for N Ireland or UK to avoid these taxes.

 

[Zion2022]

thats worse than deemed disposal if you think about it

It’s definitely not worse than the exit tax/deemed disposal regime…but it might be worse than the CGT regime depending on your time horizon.