Evaluating the Best DCA Investment for Our Son: ETF vs. Investment Trust in Ireland

[fredmach]

@gmundo Im not so sure about that, but its horrific at the current rates

 

[fritz524]

@fredmach ETF tax structure is so beyond infuriating every time I see it. How have we had Fine Gael, the “pro-business” party in power so long and this hasn’t shifted. Can’t see possible incomers of SF/SD prioritising it either…

 

[fredmach]

@fritz524 It's only a few years ago this was a 23% tax. Maddening. And I don't mind 41%, its the 8 year anniversary DD that's the killer. Its obviously designed to inhibit investment in these vehicles.

 

[willumg]

@fredmach The deemed disposal calculation in the update is not correct, it's far too big.

At the first disposal only the growth on the initial 6000 and first 6000 of monthly contributions should be taxed.

The following year the growth on the next 6000 of monthly contributions should be taxed. And so on.

The file is counting all the monthly contributions made in the first 8 years as part of the growth of the initial 6000. This significantly overstates the tax (by about 650%) and decreases the ETF value.

The IT has the same problem, 33% tax is applied to the total value of the fund, not the growth of the fund.

 

[fredmach]

@willumg Apologies for the weak oversight, it was a candlight calculation. But once I revise it on these observations, the gap between the IT and ETF nett value will only increase. I'll update the figures ASAP. Thank you

 

[willumg]

@fredmach The two will be closer, since 41% of the ETF contributions need to be added back vs 33% of the IT. And taxing everything at 8 year intervals instead of each year separately reduces the compounding.

 

[fredmach]

@willumg Hi CoronetCapulet, ive updated the calculations and provided a new spreadsheet, can you review?!

 

[willumg]

@fredmach That's really impressive, well done. Do you have a version with the formulas? When it's shared it's in values so it's hard to review. Some thoughts:

So they no longer include the initial 6000.

The ETF is closer to what I had calculated using annual investments of 6000 (instead of monthly)

They shouldn't be so close. The IT should still be higher than the ETF. I have 489k vs 447k with annual steps.

From the previous version for the IT only the tax was wrong, it needed to be:

CGT = (final value - total invested) *33%

where the total invested = 6000 + (500 *12 *30) + sum(dividends after tax)

 

[sonnie]

@fredmach This post really sums up everything that is wrong with the Irish system.

Quite literally forcing the tax tail to wag the investment dog, something that quite famously should never happen.

In no other developed country would this even be a conversation.

The conversation that people should be having, is the one comparing the merits of different investment vehicles or investing strategies - for example, the fundamental differences between ETFs and Investment Trusts, investment risk, or passive vs active investing.

Instead, the conversations that are actually important are effectively ignored, because of the monumental distraction the "not fit for purpose" tax system creates.

 

[noose]

@fredmach Would you not expect annual charges for an Investment Trust to be greater than 0.5%? My understanding was most of the most popular ones were in the 1%~2% range??

 

[destony]

@noose It looks like OP compared VWCE etf to FCIT which have 0.22% and 0.54% fees respectively. So it adds up.

It’s a good comparison too as both share lots of similarities in investment choices besides the IT’s gearing

 

[fredmach]

@destony Correct, i based this on a similar post made here a while back but its was on a lump sump investment and not DCA

 

[ragheb]

@fredmach Deemed disposal is absolutely criminal. It's the anti-personal wealth tax.