Will ISA's be coming to Ireland anytime soon?

[joe sod]

Hopes for Irish ETF tax changes as fund value expected to reach €3 trillion here by 2029

The Irish funds industry is hopeful government ministers will move to tweak the tax treatment of exchange-traded funds (ETFs).

www.ey.com

a good analysis of the funds industry calls on government for reforms of exit tax regime from the point of view of Ireland having 70% of the european ETFs domiciled here worth trillions yet irish retail investors are a tiny proportion of that. The most important change needs to be the abolition of deemed disposal completely.

 

[ashambles]

think any need of that kind would be met in a much more simple and straightforward fashion by allowing early access to pension funds in the case of people who are laid off in their 50s, etc. Having two separate savings vehicle would make people choose, at the time they were putting money in, whether they were saving for retirement or for unforeseen life events occurring pre-retirement, and it's in the nature of unforeseen life events that you can't know in advance whether, or how much, provision it is optimal to make for them. You'd be forcing people to commit to one or other in advance for no good reason.

The UK has pensions and ISAs, Denmark has tax efficent investment accounts and pensions.

Right now people already choose to decide to keep money in cash versus directing it to a pension. Irish households have a lot of cash on deposit - that is where Irish people invest for unforseen life events.

Due to the tax relief on the way in Revenue and the DoF will be reluctant to give flexible access to pensions. What we need is a way to invest without tax relief on the way in, but is otherwise tax efficient.

 

[TomEdison]

Right now people already choose to decide to keep money in cash versus directing it to a pension. Irish households have a lot of cash on deposit - that is where Irish people invest for unforseen life events.

Due to the tax relief on the way in Revenue and the DoF will be reluctant to give flexible access to pensions. What we need is a way to invest without tax relief on the way in, but is otherwise tax efficient.

People have a lot of money on deposit, where it attracts DIRT at the rate of 33%. The rate of exit tax on managed funds is 41%. It may be that the 8% difference in tax rates is steering people towards deposits for their "rainy day" funds.

If so, that distortion is removed by aligning the exit tax regime with the DIRT tax regime. This argument doesn't provide a case for saying that we need a vehicle which offers wholly tax-free growth on investments in managed funds; just that we should not tax managed funds more heavily than deposit interest.

It's also quite possibly the case that the heavier tax on managed funds is not the only factor at work here. For "rainy day" money people may be very averse to volatility — they've no idea when they'll need their money but they reckon that, when they do need it, they may need it immediately. So they may prefer cash deposits over equity funds because that the amount they have put in will always be available to them. To the extent that that's true, aligning DIRT and exit tax might not result in much shift from deposits to managed funds. (This aversion to volatility may not be entirely rational, but that won't make it any less powerful an influence over the choices people make.)

We could also ask the provocative question — does, or should, the government care, on way or another? Should governments want us to invest in equity funds rather than in bank deposits? Why? Are there reasons why they might, in fact, prefer us to invest in bank deposits?

It's easy for me to press for tax changes or concessions that will benefit me personally. But the argument that this will benefit me personally is not a particularly compelling one to anybody who isn't me, or somebody very like me. An argument for a tax change is much more likely to be successful if it's framed in terms of what will benefit the public finances, or the national economy, or some other common good.

Tl;dr: I can see why I might like earnings in managed funds to be taxed lightly or not at all, but why should the government want that?

 

[blackdog]

If so, that distortion is removed by aligning the exit tax regime with the DIRT tax regime. This argument doesn't provide a case for saying that we need a vehicle which offers wholly tax-free growth on investments in managed funds; just that we should not tax managed funds more heavily than deposit interest.

The inability to offset losses against gains in another ETF, and the incredibly complicated administration of unrealised gains tax ("deemed disposal"), are two further barriers here.

Both of these are avoided by taking out a life wrapped savings contract from an insurance company, but at the expense of 1 percent of your premium being levied by the government at entry, plus a higher management charge (>1 percent typically), on top of the punitive tax treatment.

This will be another concern for the government - any changes to the pre-retirement savings tax regime must be calibrated to avoid mass exits from life wrapped savings contracts, whose competitiveness is already stifled by heavy capital requirements imposed at the EU level in the past decade.

 

[TomEdison]

If you're arguing that the exit tax regime is burdensom and unfair, you're pushing at an open door as a far as I'm concerned.

But there's a great gap between "the exit tax regime is burdensome and unfair" to "therefore we should have no tax at all on income or gains from managed funds". I don't think we have developed a compelling case that bridges that gap just yet.

The will of the people will pretty much always favour tax reductions; it doesn't follow that every tax reduction/exemption/concession that anyone suggests is mandated by the will of the people. And I think we're going to need a firmer grounding in public policy than "these savings were made out of already-taxed income". That would apply equally to all forms of savings, not just managed funds. And, for those who don't save their marginal euro but spend it instead, it would apply to their expenditure also — it shouldn't attract VAT.

I think possible ways forward include:

• Look into public policy arguments for why government should encourage modest-scale personal investment in equities. (And look into arguments to the contrary, because those are going to have to be countered.)
• Lean heavily into the complexity and distortions created by different tax regimes for deposit interest, earnings on managed funds, earings from direct investment in shares. Propose a simplified and uniform tax rule for them all.
• Focus on getting the rate of tax under that rule as low as possible.
• Argue for a special savings account-type relief — effectively, an ISA-type arrangement, but set (initially) with a low enough cap that it won't deliver the bulk of its benefits to people who are already relatively well-off. Effectively you want something that is going to deliver a similar benefit to the great bulk of taxpayers. (Once you have it, then you can focus on efforts to raise the cap, if you want.)

 

[Zion2022]

Lean heavily into the complexity and distortions created by different tax regimes for deposit interest, earnings on managed funds, earings from direct investment in shares. Propose a simplified and uniform tax rule for them all.

This is the key point for me. It seems absolutely beyond insane to me that our tax regime strongly steers individual investors (through taxation) into

- Individual stock holdings
- Small start ups (EIIS)

Given the population is pretty financially illiterate and nervous of volatility (given our history with AIB & BOI shares etc.), this is bonkers.

To me there’s a strong argument to make individual stock holding extremely punitive.
We should be almost forcing people to hold diversified ETFs. Whether this is done by making ETFs more favourable or individual shares less is debatable.

Personally while I’d like to get rid of them for my personal benefit, I cannot argue with deemed disposal or the 41% rate in a vacuum. I do, however, just fundamentally disagree with the inability to offset gains and losses as it will always discourage regular saving in favour of lump sum investing.

 

[TomEdison]

This is the key point for me. It seems absolutely beyond insane to me that our tax regime strongly steers individual investors (through taxation) into

- Individual stock holdings
- Small start ups (EIIS)

Given the population is pretty financially illiterate and nervous of volatility (given our history with AIB & BOI shares etc.), this is bonkers.

This happens, I'm guessing, because those particular enterprises have difficulty raising capital by other means. So the primary motivation for this this tax relief is to benefit them, not to benefit the investors.

 

[Dr Strangelove]

The slightly smaller elephant is in the shape of the €20 billion or so that households have in state savings products.

This is a cheap, stable source of finance for the sovereign and indeed it was very helpful about 15 years ago when the state couldn’t borrow on financial markets.

 

[Zion2022]

because those particular enterprises have difficulty raising capital by other means

For sure on EIIS. It’s just all a bit galling when considered collectively with how we treat equity investing in Ireland - steering the population into what most advisers would call reckless behaviour and strongly discouraging low cost, diversified holdings.

Next we’ll be exempting gains on options and leveraged trades.

 

[TomEdison]

For sure on EIIS. It’s just all a bit galling when considered collectively with how we treat equity investing in Ireland - steering the population into what most advisers would call reckless behaviour and strongly discouraging low cost, diversified holdings.

Next we’ll be exempting gains on options and leveraged trades.

There's no particular public interest in steering investment capital into options and leveraged trades. Whereas there is in encouraging the provision of venture capital for small businesses.

I don't think it's fair to say what we are "steering the population" into reckless behaviour. How many taxpayers actually have EIIS investments? Partiuclarly direct investments, as opposed to investments in diversified EIIS funds? The brokers and financial advisers who facilitate and provide these investments have the same duties to investors as they always do, to ensure that they understand the investment and the attendant risks, etc. I don't think it's the function of the tax system to steer taxpayers into making financially optimal decisions; that's what you have investment advisers for, and tax mechanisms would be a poor substitute. If unsophisticated investors who don't understand these investments, or for whose investment objectives, risk tolerance, etc these investments are not suitable are putting money into them, that's a failing of the investment advisory trade more than of the tax system.

Presumably, the rational for the EIIS incentives is precisely that venture capital investments are relatively high risk and do have high overheads, and for these reasons it is difficult for smaller Irish enterprises to secure venture capital. If people would invest enough in these enterprises without the tax incentives, there'd be no case for the tax incentives.

 

[joe sod]

We could also ask the provocative question — does, or should, the government care, on way or another? Should governments want us to invest in equity funds rather than in bank deposits? Why? Are there reasons why they might, in fact, prefer us to invest in bank deposits?

The government will never admit it but it is to their advantage that so much money is sitting on deposit earning little, this is because banks are mandated ever since the financial crash to hold so much capital in "safe assets "(government bonds) , I think the Irish banks and pension funds are the largest holders of Irish government bonds. In effect they are forced buyers of bonds so that gives the government cheap funding when they need to goto the bond markets. There is an ulterior motivation in all these shenanigans methinks

 

[TomEdison]

The government will never admit it but it is to their advantage that so much money is sitting on deposit earning little . . .

I don't think this is a secret, or something the government would be coy about acknowledging. There's an obvious public interest in the cost of borrowing by the State being minimised, and the tax system has pretty much always include elements aimed at facilitating this. Interest paid on State savings is tax free to Irish-resident holders; why do you think that is?

If there's a proposal to change any aspect of the tax system in a way that would tend to raise the cost of State borrowing, of course that's going to factor into any decision on that proposal.

 

[Zion2022]

There's no particular public interest in steering investment capital into options and leveraged trades. Whereas there is in encouraging the provision of venture capital for small businesses.

My perspective is that for any government, but particularly in a country which shows low maturity and trust in relation to investing, consumer protection and confidence is the primary objective. If the government wants to support small Irish businesses, it should do that through the exchequer and pool the risk. Offering a massive incentive to individual investors on a product which is inappropriate for 95%+ of the population is silly in my view.

How many taxpayers actually have EIIS investments?

’Nobody uses it anyway’ is not a justification of the principle in my opinion.

I don't think it's the function of the tax system to steer taxpayers into making financially optimal decisions;

I partially agree with this. I’d argue taxes predominantly serve two purposes. Either to encourage behaviour or raise revenue. I highly doubt CGT vs Exit Tax is a material revenue raising issue in context of our budget. I doubt they even know what the impact is. It is therefore reasonable to conclude it’s primarily influencing behaviour….but in the totally wrong way. Whilst I could support your statement that tax system should not steer decisions (although I don’t think it would hurt if done correctly), we have this bananas scenario where suboptimal investing avenues become the least worst option. I don’t know how many threads I’ve read here and elsewhere where people are trying to find ways to replicate low cost passive indexes through investing in a basket of direct shares (what I do) or using investment trusts.

For the uninitiated the best advice is probably just forget about it, it’s too complicated and our expensive. For the initiated it’s a pain in the neck. There are no winners. Unless we say the state is as everyone just puts money in state savings. But if that’s the goal just apply exit tax to all equity investments equally

 

[TomEdison]

If the government wants to support small Irish businesses, it should do that through the exchequer and pool the risk.

To a large extent the risk is already pooled, in that the bulk of EIIS invesments are made through managed funds, rather than directly.

This way, the risk is pooled between those people who choose to take the risk. Your way, the risk would be pooled among all taxpayers — nobody would have the option not to take this risk.

’Nobody uses it anyway’ is not a justification of the principle in my opinion.

That wasn't what I meant — sorry, I wasn't clear. My point is that the taxpayers who actually make EIIS investments are not a random sampling of the population. They are people who have accumulated capital to invest and who have access to advisory services in relation to their investments. So I don't think it's fair to say that the government is steering "the population" towards risky EIIS investments; the great bulk of the population will never have occasion to consider making an EIIS investment.

But if that’s the goal just apply exit tax to all equity investments equally

You'd stil be left with a distortion as between equity investments and deposits/loans/bonds.

Should public policy favour deposits/loans/bonds over equity investments? Well, no doubt the argument could be made. But unless it is made, and unless judged to be it's a good argument, then I think you'd say that the tax regime ought to be neutral as between different investment asset classes.

A large part of the policy justification for DIRT and, in due course, the exit tax was to combat tax evasion. That's a good justification, and it has been fairly successful at that.

A second policy consideration was to simplify tax compliance for the taxpayer and this, too is a good justification. I think a lot of relatively unsophisticated investors would be deterred from investing in real assets (equities, property) if they had to account separately for tax on income and gains, or for each separate investment that they hold. The convenience of a flat rate tax deducted at source does make investment accessible for a signficant cohort of taxpayers.

Between these two considerations, I think I think taxation of investment earnings at source at a flat rate is probably here to stay.

But I think the flat rate should be reasonable, and have a robust justification. It should reflect the fact that the underlying return is a mixture of income (in principle, taxable at marginal rate) and gains (subject to CGT). It should also reflect the loss of opportunity to "manage" the gains portion of the return by timing disposals, crystalling losses, etc. Given considerations like that, I think 41% is far too high a rate. Damned if I know what the right rate is, though; I think a lot of work would have to be done to identify a uniform investment earnings tax rate that would yield for the state approximately the same revenue that could be expected if income and gains were assessed and taxed in the taxpayers hands via the tax return (which I think is the rate that, theoretically, you should be trying to identify).

 

[ashambles]

People have a lot of money on deposit, where it attracts DIRT at the rate of 33%. The rate of exit tax on managed funds is 41%. It may be that the 8% difference in tax rates is steering people towards deposits for their "rainy day" funds.

We can look to the relatively recent past to see that the relative tax rates don't seem to have much effect. Around 2008 when DIRT was 20%, CGT was 20% and exit tax 23%, people still were favouring zero interest cash accounts over investments.

What steers people to deposits is their simplicity and certainty - regardless of the level of DIRT.

 

[Protocol]

The majority of my colleagues, aged 40-60, do not know what an ETF is, and have never heard of an ETF.

The exit tax could be 0%, and there would not be a large behavioural response from them, to switch from deposits to EFTs.

They are aware that deposit accounts offer low rates, yes.

They are somewhat aware that there are alternatives to deposit accounts.

They are aware of AVCs.

It is more an issue of awareness and attitudes.

 

[DazedInPontoon]

Irish households have a lot of cash on deposit - that is where Irish people invest for unforseen life events.

I wouldn't so much call it 'investment' as attempting to store something in a leaky bucket. Inflation ensures that asset-holders gradually siphon value away from cash-holders.