Key Post The Tax Treatment of ETFs for Irish residents

Gordon Gekko

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What makes you think that EU UCITS bond funds are higher yielding? I don't understand what you mean?

In regards to the tax there are other factors such as income level, reliefs and costs to take into account.

My point is that for higher yielding / more income focussed “things”, they are generally better held via UCITs type structures to get 41% treatment rather than 52%.
 
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lledlledlled

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Do Investment Trusts still fall under CGT tax treatment or has this loophole been closed as well, similar to US domiciled ETFs?
 

lledlledlled

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Yes. UK domiciled investment trusts fall under the normal income tax/CGT regime.

Ok, at least that's something. I previously invested in IT's but recall that most appeared to be UK-based, even if they were tracking US stocks.
Is there a database somewhere that makes it easy to identify the options still available to Irish investors wishing to avail of CGT treatment?
 

Sarenco

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You should only invest in UK-domiciled ITs if you want to get income tax/CGT treatment (avoid any IT domiciled in the Channel Islands).

The AIC website is a good source of information - www.theaic.co.uk
 

lledlledlled

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You should only invest in UK-domiciled ITs if you want to get income tax/CGT treatment (avoid any IT domiciled in the Channel Islands).

The AIC website is a good source of information - www.theaic.co.uk

Sorry, a bit confused now. I thought it was Income Tax treatment OR CGT treatment, the advantage of the latter being that it is a lower rate i.e. 33%?
Which rate are UK-domiciled ITs subject to? If it is CGT and not Income Tax, they would appear to be an attractive alternative to ETFs for irish investors. Unless i'm missing something?
 

Sarenco

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Income tax (plus PRSI and USC) on income (dividends) and CGT on capital gains.

Just like any other shareholding.
 

lledlledlled

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Income tax (plus PRSI and USC) on income (dividends) and CGT on capital gains.

Just like any other shareholding.

Perfect, thanks for clarifying. Last time i stuck with ITs which focus on growth rather than dividends, in order to minimise income tax on the latter. Looks like this is still the way to go.
The tax regime for investing in Ireland is ridiculously penal. Outside of mortgage overpayments and pensions, there are very few options, especially if you don't want to lock you money away for decades.
 

Marc

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We give this free to clients invested in our Irish tax optimised portfolios

 

Gordon Gekko

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Hi Marc,

Who selects the investments?

Can you provide some detail around the organisation’s research and compliance resources?
 

Marc

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Sorry I don't have time to list all the team but here are the CVs of some of the Investment Team who manage over $2BN across Europe, UK and SA.

BRANDON ZIETSMAN
CEO and Chief Investment Officer
BCom (Accounting & Law), HDip (Tax), CFA®, CAIA, IMC
Brandon-new_300x200.jpg

Brandon started his career at Investec in 1994 before joining RMB Fund managers, where he headed up product development. During this time, much pioneering work was done in derivative structuring. In 1997, Brandon additionally assumed responsibility for the sales division and was appointed to the board.
In 1999, Brandon joined Mercury Consolidated Holdings (a boutique financial services firm engaging in specialist derivative structuring, broking and risk management) as a director and co-head of structured products, where a number of global-first products were successfully developed.
Brandon re-joined RMB Asset Management in 2001 as an executive director with responsibility for product development and structuring. The following year he was appointed head of quantitative research before assuming the role of CEO of RMB Unit Trusts, which he held until 2008. During his tenure as CEO, Brandon was a member of a number of FirstRand boards and executive committees.
Brandon was approached by Barclays in 2008 to Head up the Investment and Product Office at Absa Wealth, which included all aspects of investments (as Chief Investment Officer), banking and credit as well as fiduciary services. He was actively involved in the Absa Group strategy on wealth management and remained involved in product support and strategy formulation for the group after his departure on a consultancy basis.
Brandon has been actively involved in the broader industry for many years, having previously sat on the board of the CFA Society of South Africa as well as the board of the then Association of Collective Investments. He frequently participants in industry panel discussions and is a great supporter in advocacy initiatives that promote ethical behaviour in the financial services industry.
In early 2010, Brandon left the corporate environment and founded PortfolioMetrix. He is a CFA® charter holder, a CAIA charterholder and has a Bachelor of Commerce degree and a post graduate diploma in tax law from Wits University.

MIKE ROBERTS
Chief Proposition Officer
MEng (Aerospace Engineering), CFA®, IMC
Mike_2_300x200.jpg

Mike is the global Chief Proposition Officer at PortfolioMetrix and responsible for driving and enhancing the entire award-winning proposition across the multi-location business by ensuring innovation and best practise in terms of investment management, suitability tools, regulation and marketing. Mike is also a key member of the investment team responsible for all areas of asset allocation, fund selection and portfolio construction.
Prior to starting PortfolioMetrix Mike worked as an Investment Adviser at Barclays Wealth in London. Mike’s primary responsibility was designing and maintaining long term asset allocations and portfolios for high net worth individuals. As the key investment individual in the Front Office Investment Committee, Mike often led the discussions around fund selection, asset allocation and portfolio construction and often chaired the meetings. During this time Mike discovered the inefficiencies in the classic approach to wealth management and portfolio management and set about designing and building a new portfolio construction system. This system was rolled out to the entire global front office and is now a key tool for portfolio construction at Barclays Wealth.
In 2003 Mike joined BlueBay Asset Management, an institutional specialist manager of fixed income credit funds. Mike’s main role was as a Structurer in the financial engineering team, which provided a suite of products across three key areas – fund derivatives, structured funds and CDOs. Mike also worked with the portfolio managers on portfolio strategies, rebalancing/optimizing, risk analysis, advanced derivatives strategies and building various models.
Mike’s first role after leaving university was as a Quantitative Analyst Programmer at OCCAM Financial Technology which produces portfolio optimisation and risk analysis software. Mike was responsible for a number of new systems including a market leading portfolio risk analysis system.
Mike holds a Master’s degree in Aerospace Engineering from UMIST and is a CFA® charterholder. Mike has 20 years of experience in the financial services industry.

NIC SPICER
UK Head of Investments
BSc (Hons) (Actuarial Science), FFA, CFA®, IMC
N-Spicer_headshot_2018-300-x-200.jpg

Nic is UK Head of Investments for PortfolioMetrix, looking after UK client portfolios on a day to day basis. He is a member of PortfolioMetrix’s global investment committee and, as well as being deeply involved in asset allocation, he spearheads PortfolioMetrix’s fund selection process in the UK.
Nic is recognised in the Wealth Manager Top 100 for 2019 – their list of the leading fund selectors across the UK and Channel Islands.
Nic began his career with a year of lecturing actuarial science and statistics at his alma mater, the University of the Witwatersrand, before heading off to complete an internship in BMW’s financial controlling department at their Munich Headquarters. There he worked on currency, interest rate and liquidity risk management for the global group.
In 2007 he moved to London to take up the position of analyst within a boutique investment company where he was involved in numerous projects, primarily for a capital markets focused client but also for certain mining-oriented clients. He worked on a diverse set of asset classes (equities, bonds, derivatives, structured products and alternative investments) but with a focus on the day-today oversight of a levered portfolio of hedge fund investments.
Nic is an actuary, a CFA® charterholder and graduated with distinction from the University of the Witwatersrand with a Bachelor of Science (Hons). He has over 12 years’ worth of financial services experience.

BRENDAN DE JONGH
SA Head of Investments
BCom (Investment Management), BCom (Hons) (Financial Planning), CFP®, CFA®, IMC, CAIA
B-de-Jongh_headshot_2018-300-x-200.jpg

Brendan began his career in 2008 as a trainee financial advisor after completing his undergraduate degree from the University of Pretoria. While gaining valuable experience in the financial planning industry, Brendan studied part-time for his Honours qualification as well as the CFP® designation. He worked as a financial consultant to individuals as well as the technical trainer at Alexander Forbes prior to joining PortfolioMetrix in 2013.
Brendan is a CFA charterholder, having successfully completed all three levels in consecutive years, and is a CAIA charterholder.

MICHELLE BLAAUW
Investment Analyst
BCom (Hons) (Investment Management)
M-Blaauw_Headshot_2018-300-x-200.jpg

Michelle joined Portfoliometrix in 2013 with over 12 years of experience in the financial services sector. She began her career in 1995 as an Equity Research Analyst with top local stockbroker at the time, Barnard Jacobs Mellet. After 3 years analyzing Small Cap Industrials and the IT Sector, she decided to broaden her exposure and tap her people skills with a move to trading. Here she headed up the BJM Private Client Equity Trading Desk, which enabled her to share advice and give equity recommendations to private investors. A promotion onto the main BJM Institutional Trading Desk in 1999 saw her gain 6 years of experience in Arbitrage Trading, Forex and Equity Sales Trading, servicing both local and international Asset Managers.
In 2004 Michelle was approached to join Standard Bank’s Andisa Stockbrokers which later became Credit Suisse Standard Securities (a joint venture between Credit Suisse and Standard Bank). It was here that she made a name for herself in Equity Sales and afforded her direct exposure to all of South Africa’s top Fund Managers.
Michelle holds a BCom Honours degree in Investment Management, beginning with a year at the University of Colorado in the USA and later Wits, with her Honours degree through Unisa.

LIAM DAWSON
Investment Analyst
BEng (Mechanical Engineering), CFA®, CAIA
L-Dawson_Headshot_2018-300-x-200.jpg

Liam completed his Mechanical Engineering degree at the University of Pretoria in 2011 and soon thereafter began a career in the Mining and Metals Industry as a Mechanised Mining Applications Consultant.
Liam left this promising career to follow his passion and curiosity for investing. This move has directed him along a new career path where he applies his mathematical and reasoning ability to investments and wealth management under PortfolioMetrix’s distinctive risk-based approach.
Liam joined PortfolioMetrix in 2015 as an Analyst, and is a CFA® and CAIA charterholder.

RUSSELL BROWN
Investment Analyst
BCom (Finance), MSc Finance (cum laude)
R-Brown_headshot_2018-300-x-200.jpg

Russell joined PortfolioMetrix in April 2013 as an Investment Analyst having just graduated from Plymouth University with a Master’s Degree in Finance, he was awarded the qualification with Distinction in 2012. Prior to this, he completed his B.Com. in Finance at the University of Johannesburg and a National Certificate in Financial Markets and Instruments at the Academy of Financial Markets.
Whilst working at PortfolioMetrix, Russell’s primary responsibilities have included portfolio optimisation to derive the strategic asset allocation of portfolios, fund selection and manager research, performance reporting and the day-to-day monitoring of PortfolioMetrix’s building block unit trusts. Russell is also intricately involved in insuring that PortfolioMetrix’s asset management process is seamlessly translated across into WealthExplorer™.

PHILIP WELLINGTON
Investment Analyst
BSc (Hons) (Forensic Science), CFA®
Phil_300x200_2.jpg

Phil joined PortfolioMetrix in September 2016. He works as an investment analyst within the asset management side of the business. Here his main responsibilities cover both the asset allocation and fund selection processes to enable a wide range of diversified and customised portfolios to be built. In addition, he is responsible for monitoring portfolios on an ongoing basis to ensure that client money is invested in-line with their mandate.
Phil began his career at the Bank of England in 2008 and worked in a variety of roles during his time there, covering banknote management and monitoring, retail interest rate statistics and international bank supervision. The majority of his time was spent within the markets department, firstly in credit risk operations, then he moved into a valuation & market risk monitoring role and latterly working within the market intelligence function. This involved speaking to participants across a broad range of different financial markets, analysing and synthesising these views, and helping deliver this market intelligence to the monetary and financial policy committees and other senior staff.
Phil holds a Bachelor of Science (Hons) in Forensic Science from the University of the West of England in Bristol. He is also a CFA ® Charterholder, passing all three levels in consecutive years.
 

Cormac

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I’ve modelled investment scenarios via a UCITS Accumulating ETF vs a distributing Investment Trust/US ETF.
Some points of note:
EU listed ACC ETF: dividends accumulating within the fund. Exit tax at 41%. Deemed disposal every 8 years. The Deemed Disposal Revenue bill to be paid from other funds, so I don’t touch the money within the fund at all, retaining the compounding power of the fund (how practical this would be is debateable; opportunity cost would be another, intangible consideration).
Investment Trust/US ETF: CGT @ 33%, dividends taxed at 52%. The Dividend Revenue bill to be paid from other funds, so I don’t touch the money within the fund at all, retaining the compounding power of the fund. Can offset losses using the CGT regime (hopefully, not a major consideration given the time-frame: other assets a person may have may have some bearing on their choice of tax regime, CGT or Exit Tax)
US ETFs: may not be accessible to the retail investor. For the purposes of this comparison, a US ETF is taxed the same as the majority of Investment Trusts. (I have read that some ITs are accumulating, but the vast majority distribute dividends)
Fund Management Fees (Cost of Ownership): Set at 0%. In reality, they would differ. In the interests of not adding in another layer of complexity, I have kept them at 0%.
Brokerage Fees and Commissions: omitted these. In reality, they would add to the cost. In the interests of not adding in another layer of complexity, I have kept omitted them.
I would welcome any critique/correction of my figures. In particular, I would like to know am I applying the Deemed Disposal rules correctly. Am I applying the tax credit for previous tax paid correctly in my examples?
My calculations result in quite a discrepancy, which makes me suspicious that I have made a (glaring) mistake somewhere! I am not professional in this field and my efforts here may well mark me out as a rank amateur!
If someone has the time and willingness to cast an eye over this, I would be most grateful!
 

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  • UCITS ETF or Investment Trust US ETF Tax Projection.xlsx
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Sarenco

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Treatment already modelled here -

Fantastic summary and modeling of Irish tax situation on ETFs.

Hat tip to @Iamyourfriend who posted it on another thread
 

Cormac

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Treatment already modelled here -
Does anirshinvestorgude.wordpress.com allow for tax credits on previous tax paid in the EU UCITS Acc calculations?
Also, in my model, Revenue taxes are, theoretically at least, paid from other funds. This obviously affects matters.
Are my numbers correct? (Even if my assumptions are fanciful!)
 

Sarenco

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I haven't checked your numbers but you are going to get very skewed results if you assume that taxes on dividends and exit taxes will be discharged out of other sources of funds.
 
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Gordon Gekko

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It’s a very hard thing to model correctly.

What tax band is the holder in?

Does he/she reinvest after-tax dividends from a US ETF/Investment Trust?

And what about the tax treatment on death, a huge point? An unrealised gain on a 41% fund is taxable on death, even if it’s inherited by a spouse. An unrealised gain on a CGTable asset disappears on the other hand.

I always find with these things that there comes a tipping point where you’re making so many assumptions that the whole thing becomes a farce.

I prefer to look at it like this; if the person has maxed pension and mortgage repayments before investing personally, which one should do, this is probably money that doesn’t need to be dipped into. In which case, not getting hit with tax every 8 years so it can compound over time and no tax on death are huge points. Yes you pay full marginal rate income tax etc on the dividends but one would expect the greater part of returns over a multi-decade basis to come from capital gains.
 

Cormac

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Sarenco, Gordon,

Thanks for the replies.
I haven't checked your numbers but you are going to get very skewed results if you assume that taxes on dividends and exit taxes will be discharged out of other sources of funds.

Sarenco, I would accept that what you say is correct. If my figures are correct and if paying Revenue from other funds was a viable option, would this definitively place one option ahead of the other?

Albeit, ‘definitively’ is a dangerous word to use when one is making these sort of projections. Reality will not prove as linear as any model in this area. Most opinion would seem to favour the CGT regime. However, is it a cut and dried answer? Can a case be made for Ext Tax being more beneficial?

It’s a very hard thing to model correctly.

Gordon, it would seem that it is indeed a very hard thing to model correctly or accurately. I’m not a mathematician or accountant, so maybe I haven’t made a good job of it. But, of course, a model will make all manner of assumptions that will, in reality, not bear out. Most obviously, there will not be the linear growth/dividend yield that I have modelled.

The model assumes that the holder is a higher rate tax payer.

The model assumes that the holder will reinvest all dividends back into the US ETF/Investment. (As I said, paying Revenue the tax bill from other funds may be fanciful and will come at, at least, opportunity cost.)

Tax treatment on death, I had not even considered.

I always find with these things that there comes a tipping point where you’re making so many assumptions that the whole thing becomes a farce.

Indeed. Point well made. Would this suggest, in your opinion, that there is no definitive answer to this question?

In which case, not getting hit with tax every 8 years so it can compound over time and no tax on death are huge points. Yes you pay full marginal rate income tax etc on the dividends but one would expect the greater part of returns over a multi-decade basis to come from capital gains.

You would then, seem to favour the CGT regime over Exit Tax.

I appreciate the replies. Maybe I’m guilty of looking for the perfect plan, when a good plan would do. Perhaps my search for a definitive answer is a fool’s errand ….

Any further comment/critique/corrections would be welcome.
 

Sarenco

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An unrealised gain on a 41% fund is taxable on death, even if it’s inherited by a spouse
My understanding is that the estate effectively steps into the shoes of the deceased investor for exit tax purposes. No?
I always find with these things that there comes a tipping point where you’re making so many assumptions that the whole thing becomes a farce.
That's a fair point.

For example, so far this century nearly three quarters of the 4.23% annualised return on global equities (MSCI World) came from dividends.

I doubt many would reflect that ratio of income/gains in any future projections.
 
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