NEWS & VIEWS
Tax Talk is a regular series written by FSL’s Tax Reporting Analyst, Alex Ranahan. Alex has ten years’ experience as a tax adviser and analyst. He is accredited by The Association of Taxation Technicians and is co-chair of the Tax Committee for The Investing and Saving Alliance.
Alex’s Tax Talks are on general topics and are not tax or financial advice. If you are unsure of the treatment of a transaction, we encourage you to seek the appropriate advice.
In this edition of Tax Talk, I thought I’d cover some interesting quirks of Irish tax law: exit tax and the eight-year rule. But before we dive in, it might be worth running through a quick refresher on how capital gains tax (CGT) works in Ireland.
Irish CGT: Rules, Rates and Exemptions
In Ireland, the rate of CGT is 33% for most gains. This rate applies to the gains made from the sale, gift, or exchange of assets such as land, shares in companies, and currency.
Like the UK, individual investors have a personal exemption amount. However, in Ireland, the exemption amount is EUR1,270 a year. Investors are entitled to this exemption, whether they are an Irish resident or not.
Different tax rates apply to certain gains made venture capital funds. For individuals and partnerships, the rate is 15%, and for companies it’s 12.5%. Gains made from foreign life policies and foreign investment products are subject to a higher rate of 40%.
Gains made from investment funds and exchange-traded funds (ETFs) are taxed under a different tax regime entirely – but we’ll get into the ins and outs of that later.
Reporting CGT in Ireland
When an investor makes a disposal, they must file a tax return for CGT by 31 October of the following year.
For disposals made between 1 January and 30 November – known as the initial period in Irish tax – an investor must pay CGT on any gains by 15 December of the same year. For disposals made in the month of December – known as the later period – an investor needs to pay by 31 January.
All straightforward so far.
Exit tax
Gains made from investment funds and EFTs are taxed under a different tax regime in Ireland. Known as the ‘gross roll-up’ regime, the fund is exempt from tax on the profits it earns on the investments. Instead, these profits ‘roll up’ within the investment until a chargeable event occurs.
In this context, a chargeable event is one of the following:
- The payment of an annual dividend or other regular distribution out of the underlying investments on the fund.
- The cancellation, redemption or repurchase of a unit.
- The transfer by a unit holder of their entitlement to a unit in the fund.
- The appropriation or cancellation of units by a fund to meet the amount of tax payable on a gain arising from a transfer of units by a unit holder.
- The end of an eight-year period beginning with the acquisition of a unit in a fund, and each subsequent eight-year period beginning when the previous one ends, where that period ending is not otherwise a chargeable event.
In short, exit tax is charged on a sale, transfer, or cancellation of units, and on every eighth anniversary of acquisition under Irish tax legislation. When this chargeable event occurs, a tax rate of 41% is generally charged on the gain.
The Eight-Year Rule
Yes, an investor will have to pay a 41% tax rate on the eighth anniversary of their acquisition of units in a fund or ETF, regardless of whether they’ve actually sold any of their units.
It’s a quirk of Irish tax law that has faced a fair amount of criticism, with one Irish Times reporter dubbing it a “bizarre system” that encourages people to leave their savings “rotting in low-rate deposit accounts.”
It’s not the place of a UK Tax Talk to pass judgement on Irish tax laws but it’s perhaps not surprising to many people that the Irish Department of Finance officials recommended back in October that the tax rate for funds be aligned with the 33% rate that applies to direct investments like stocks and property.
The rules do say, however, that when calculating the exit tax on an eighth anniversary (the simplified calculation of which would be the investment’s current market value minus cost), the taxpayer can deduct exit tax amounts already paid to avoid double taxation.
Also, if there is no profit, then no tax is payable. If the fund subsequently falls in value, an investor can submit a claim to the Revenue Commissioners for overpaid tax on a deemed disposal.
To add additional complexity, for regulated, managed Irish funds, tax compliance the responsibility of the fund itself. This means the eight-year exit tax is organised by the fund and the investor shouldn’t have any additional payment obligations – though they will still need to report the gain on their Form 11 tax return!
In contrast, tax compliance for regulated ETFs – whether Irish-domiciled or not – is the responsibility of the investor themselves. For all non-Irish funds, tax compliance will be the responsibility of the investor.
How FSL handle exit tax and the eight-year rule
At FSL, we incorporate all the complexities and quirks of Irish CGT rules in CGiX and format our reports to make any of these tax law intricacies more easily digestible for our clients and their customers.
A recent enhancement to our Irish CGT reports was to include a column clearly indicating the eight-year rule. The column allowed clients to easily see the number of days and years that have passed since their initial investment. This column will then turn red once the holding hits its eight-year anniversary.
By doing so, we hope our customers can clearly indicate to their clients which of their investments have been impacted by the exit tax rule, making tax compliance and reporting easier.