What is the issue with the 8 year deemed disposal?

[war_eagle]

Hi there,

I just wanted to understand why is everyone against the 8 year deemed disposal rule on ETFs?

If you invest for 40 months and after that period you sell and pay your taxes its the same as paying those taxes every 8 months.

So, if you're not paying more taxes and you're not forced to sell that investment, why is everyone against it?

Just wanted to understand.

 

[anro25]

@war_eagle What is the issue? Simple, it's stupid and outdated and expensive.

1-)I have to track my buys and be sure that I don't miss 8 year deemed disposal date. Okay there are some apps to track that.

2-)So you either has to sell it or pretend that you sell it every 8 year. a-) If I sell it, I will have to pay brokerage fee. And then I will have to buy them again, which means another buy fee. b-) If I pretend that I sell it, then I will have to pay it's tax out of my pocket, then save somewhere the pretended sell price so 8 years later I will have to recalculate my gains again.

3-) Really simple answer, left it to bottom. Why the hell I should pay extra taxes just because Im investing to ETFs? Tax every 8 year impacts my gains. I can buy some shares and keep them for 8 years without paying any tax (except sale tax ofc) but if it's ETF then I have to pay taxes every 8 years. ETFs are bunch of stocks came together so it's the same thing as stocks (roughly).

Well of course the main reason of all this is the insurance companies and lobbying. They are keeping people away from ETFs so they can sell their own managed, expensive TER funds to investors so insurance companies will fill their pockets. Big ETFs managed by iShare or Vanguard is their worst enemy especially with so low TER values.

As I always say, insurance companies are the nightmare of Ireland. They abuse drivers (expensive car insurance prices), they abuse individuals (expensive health insurance policies) and abusing investors (forcing people to buy their pension funds and causing this deemed disposal bs).

Who would buy managed funds if ETFs wouldn't taxed this heavily?

Edit: ETFs are long term investments. If you start to buy ETF from today (August 2020) for next 10 years, you will have to start paying deemed disposal starting from 2028, then 2029, then 2030 etc. Good luck calculating each month's gain and doing it regularly each year after 8 years.

Edit 2: If you paid demeed disposal when the ETF was more expensive than when you actually sold it, then you have to write back to revenue and ask for the difference. Which is another PITA. For example: You pretended that you sold your ETF when it was 55 euro and you paid deemed disposal based on that, but if it's value is 50 euro when you actually sell it, then you over paid your tax so need to get the extra bits of that money back

 

[scripturewinds]

@anro25 I completely share your frustration around ETFs but some of your analysis is incorrect. The big insurance companies investment vehicles are usually OEICs which are also subject to the deemed disposal rule. The investment industry as a whole is opposed to the deemed disposal rule.

It was brought in because the country was desperate for money, the pile of cash in equity funds was seen as an easy target.

 

[spartygirl95]

@anro25 I recently started investing in ETFs, understanding the deemed disposable stuff is going to be a pain in the future. However, I don't see many great alternatives, does the deemed disposable put you off enough to not invest in ETFs, if so what do you use as an alternative?

Ireland just seems to be a terrible place to be investing from unfortunately when compared to the UK etc.

 

[anro25]

@spartygirl95 Investing in Ireland is terrible. Deposit rates are low (which is a common thing of EU) DIRT is high 33% is still high (was higher in previous years).

You have 2 options: 1- Go with shares and use yearly exemption up to some specified amount (1k something) for the gains. Well downside is, it’s a risky investment
2- Go with pension funds, one of the most popular words in Ireland. Contribute to your pension funds especially if your employer supports it. Downsides? No one mentions of the earnings, it’s big black box. If you are planning to retire elsewhere than Ireland or if you are just temporarily visiting Ireland, good luck with it. You “can” move your pension fund to somewhere else in EU but there is lots of conditions and ifs.

Oh I forgot bonds which doesn’t bring anything at all. So correct me wrong but investment in Ireland is equal to pension fund. So dull, so boring. Just like the banks in Ireland

 

[latashadavis]

@spartygirl95

what do you use as an alternative?

Have a look at investment trusts.

For example:

https://www.trustnet.com/factsheets/t/be08/scottish-mortgage-investment-trust-plc

and

https://www.trustnet.com/factsheets/t/fj19/foreign--colonial-investment-trust

Almost the same as ETFs and no stupid deemed disposal.

 

[spartygirl95]

@latashadavis I've seen these posted a bit here, thanks! the ~1000 price tag on the Scottish investment trust makes it difficult to invest in on a monthly basis but I'll keep an eye on it!

 

[latashadavis]

@spartygirl95 Dude that's 1000 British pence.. lol. I have about 500 shares of it.

 

[spartygirl95]

@latashadavis oh

 

[hrmsy]

@anro25 Deemed disposal applies to insurance company (non pension) investments too AFAIK

 

[peter1000]

@anro25

Really simple answer, left it to bottom. Why the hell I should pay extra taxes just because Im investing to ETFs? Tax every 8 year impacts my gains. I can buy some shares and keep them for 8 years without paying any tax (except sale tax ofc) but if it's ETF then I have to pay taxes every 8 years. ETFs are bunch of stocks came together so it's the same thing as stocks (roughly).

Your dividends are taxed if you buy normal shares. Your dividends grow tax free until the deemed disposal date in an ETF. Deemed disposal was brought in because of this endless reinvestment without paying any tax on the income

 

[latashadavis]

@peter1000

without paying any tax on the income

Isn't it taxed when you cash out?

 

[peter1000]

@latashadavis Yes, but it compounds tax free for 8 years first

 

[latashadavis]

@peter1000 I'd prefer it to compound tax free forever.

 

[peter1000]

@latashadavis Wouldn't we all. But you get 8 years instead of zero with normal shares

 

[latashadavis]

@peter1000 I can compound shares for the next 100 years without the government coming to steal profits every 8 years. What do you mean zero with normal shares?

 

[peter1000]

@latashadavis When dividends are paid every quarter on a normal share you need to pay tax on that when you receive the dividend

 

[latashadavis]

@peter1000 I don't do dividend stocks.

 

[war_eagle]

@anro25 Thanks for expressing your perspective.

Quick replies to your points:

1) I assume you already track your buys and where your money is, or at least you should as an investment discipline.

2) You don't have to pretend you sell your investments. On the Revenue guides and every financial guide it clearly states that you don't need to sell your holding, you just need to pay income tax at the 8th anniversary of your investment.

3) You don't pay more taxes. You pay exactly the same (you can make the calculations yourself and see). Remember that you can submit a claim to Revenue for overpaid tax in case your investment value becomes lower than the value you paid for at the 8th anniversary. Revenue will give you the refund of the difference.

I understand where you come from, but I believe the only reason why this is implemented is to certify that an investor will pay taxes over the investments they did while living in Ireland. Otherwise, you could always invest for 30 years and then move to another country for 3 months, sell your investments there and then come back and do the same, effectively avoiding taxation. People with multiple offshore residencies already do that in multiple taxable factors.

Just to be clear, I'm not advocating for the 8 year deemed disposal rule, my perspective is that there isn't a big reason for frustration aside from the slide annoyance of keeping track of your investments, as you still pay the same taxes (in case you don't unnecessarily sell your holdings every 8 years).

 

[anro25]

@war_eagle

I understand where you come from, but I believe the only reason why this is implemented is to certify that an investor will pay taxes over the investments they did while living in Ireland. Otherwise, you could always invest for 30 years and then move to another country for 3 months, sell your investments there and then come back and do the same, effectively avoiding taxation. People with multiple offshore residencies already do that in multiple taxable factors.

Sorry, I don't know you, so don't take it personal but this is the most stupid arguement ever. How come no EU country thought of this "trick"? Uh, doh! It's called exit tax. If you are leaving Ireland (aka. changing your tax residence) you have to pay "exit tax" for shares but not for ETFs. Remove deemed disposal, implement exit tax. How come other EU countries are so stupid that they could've thought of exit tax but not deemed disposal? Because it's stupid!

Plus, you just can't go to some EU country sell your shares and dodge the tax and come back in 3 months. You need to reside in another country at least 6 months so you can be that country's tax resident.

Plus plus, if you are in tax resident in Ireland for more than 4 years, you are considered, ordinary resident, which means you still have to pay taxes for non-location based gains (like stocks, ETF gains etc) to Ireland, after you leave Ireland for next 3 years!

If someone is going to another country to sell their shares and coming back to Ireland, then it's tax dodging and it's a crime.