Haven’t gotten around to updating the calc/post yet but I don’t think it’s as high as 40% difference (though likely still substantial enough). For now yes I am sticking with ETFs as I have faith that the deemed disposals will be revised in the coming years and/or Investment Trusts will be brought in line with ETFs. Obviously no way to know as I’ve said before I don’t care if I have 1 million or 10 million, if I have enough to get by then I don’t need any more and all the other reasons stated in the article still stand in terms of diversity, risk and currency.

Hi Meagan,

Just curious – it seems like you would be 40% better off if you invested in an Investment Trust based on these updates / corrections which is much better than you thought in your original blog post. So are you continuing to invest in ETFs or will you switch to ITs?

Thanks, Meagan

Sad though.

Took a while to figure out this DD stuff as information is scant, scattered and often contradicting. I was hoping that I missed something, that things weren’t as bad as they seemed. 😕

Thanks

Hi EM, Thanks for clarifying, yes I see what you are saying. It appears I wrote this article before I fully understood the application – I have updated my calculators since and they match your example more closely although I did not not remember to come back and recheck findings against older articles. Thanks for the push. I will update.

Hey Meagan,

good to see there’s no disagreement then, your assumptions are the same as mine. All the calculations I’ve done have been with those exact assumptions.

So on year 1 you saved up and invested lump sum of 35965. So we’re keeping it simple and are assuming no further investments were made after year 1.

You said Index grows about 11.91% a year, ok so 7 years later you basically double your year 1 money:

35,965*1.1191^7 = 79061

so your gain on year 8 for the investment from year 1 is:
79061 – 35965 = 43096

Thus DD tax at 41% is:
43096*0.41 = 17670

17670 is much more than 1414 that you’ve provided.

So I really don’t understand where 1414 came from, if you could please show where that came from?

Thanks

Hi EM, Thanks for your comment. I appreciate that you are trying to ensure accuracy. I read the bluewater financial post and in that example it does not clarify whether the 100k is a lump sum or accumulated gradually. Based on my understanding of the deemed disposal rule, the article is making an assumption that the 100k is a lump sum investment and showing how that would be treated over 20 years. If you read the actual tax documentation from Revenue, deemed disposal is defined as “Finance Act 2006 introduced a new chargeable event and provided that a disposal of units is deemed to occur on the ending of an eight-year period following the acquisition of the units” – see page 13 of this doc: https://www.revenue.ie/en/tax-professionals/tdm/income-tax-capital-gains-tax-corporation-tax/part-27/27-01a-02.pdf – as they have stated “following the acquisition of the units” – this to me means that you are only charged deemed disposal on the units you purchased 8 years ago NOT ALL units purchased WITHIN the last 8 years. This is the basis of my understanding in the calculations in the article.

I’m a bit puzzled by the ETF calculation.

How is the exit tax on year 8 only 1414 euro? Could you show step by step where that figure comes from please?

By my own calculations the effect of deemed disposal is far more dramatic than that and indeed why it destroys compounding long term.

So on year 1 you saved up and invested lump sum of 35k. Index grows about 10% a year, so 7 years later you basically double your year 1 money:

35k*1.1^7 = 68k

so your gain on year 8 for the investment on year 1 is 33k.

Thus DD tax at 41% is:

33k*0.41 = 13.53k

So you need to subtract at least 13.53k out of your fund on year 8 to cover the tax.

Deemed disposal absolutely destroys compounding, saying otherwise is misleading at best, there’s no way two investments that grow at same rate will have basically same value in the end if one of them is DD taxed. Intuitively doesn’t make sense. Let’s look at another numbers example.

Let’s say we invest 1 euro and our investment doubles every 8 years (typical market return at 10% CAGR):

DD case:
year 1: 1 euro

year 8: 1*2 = 2 euro -> 1 euro profit
Tax due, 1 * 0.41 = 0.41
We take the tax out of the fund so now left with 1.59
Total end of year 1: 1.59

year 16: 1.59 * 2 = 3.18 euro
In calculating the second deemed disposal, we must use the assumption that the first one didn’t occur, so we have to add the 0.41 back to the fund value.
We add 3.18 with 0.41 less the investment amount of 1, which gives us a taxable amount of:

3.18 + 0.41 – 1 = 2.59

Tax due, 2.59 * 0.41 = 1.0619

We subtract the DD tax we have already paid in year 8 again to get net tax due:
1.0619 – 0.41 = 0.6519

We pay the tax out of the fund, so the final fund value on year 16 is:
3.18 – 0.6519 = 2.5281 euro

Note: source for calculations and methodology https://www.bluewaterfp.ie/investments/calculating-deemed-disposal-on-a-long-term-investment/

year 24: 2.5281 * 2 = 5.0562
Same methodology as above, add back paid tax, subtract cost basis to get net profit for tax:
5.0562 + 1.0619 – 1 = 5.1181

Tax due, 5.0562 * 0.41 = 2.073042

We subtract the DD tax we have already paid in year 8 & 16 again to get net tax due:
2.073042 – 1.0619 = 1.011142

We pay the tax out of the fund, so the final fund value on year 24 is:
5.0562 – 1.011142 = 4.045058 euro

So lets say we exit the investment at year 24, as we paid all the tax already then the final value is the 4.045058 euro

Now let’s compare with non DD case.

Non DD case:

year 1: 1 euro
year 8: 1*2 = 2 euro
year 16: 2 * 2 = 4 euro
year 24: 4 * 2 = 8 euro

So likewise, we exit here at year 24. Total profit is 8 – 1 = 7 euro
Tax due at 33% CGT, 7 * 0.33 = 2.31 euro

Final value 8 – 2.31 = 5.69 euro

Comparison:

final value: DD vs non DD
year 1: 1 vs 1
year 8: 1.59 vs 2
year 16: 3.18 vs 4
year 24: 4.045 vs 8 (or 5.69 if we sell)

assuming we sell non DD at year 24, it’s about 40% better off than DD case.
5.69/4.045 = 1.40667

There is simply no way value of DD taxed investment is anywhere close to non DD taxed investment at the time of final disposal.

So please let us know how is the exit tax on year 8 only 1414 euro? Could you show step by step where that figure comes from please?

I hope I won’t come off too militant here, just trying to help fix a potentially what I consider to be very dangerous and misleading information as people are looking for at long term view here and mistakes decades down the line could be costly to say the least – and it won’t be apparent till decade later! So let’s put them on the right path!

I think it’s fantastic to spread financial awareness, especially in Ireland and you’re blog is a good resource for that! I hope you’ll understand that I’m being tough because I care and want to help improve things!

Cause at the end of the day, you are in a responsible position here. No matter how many disclaimers you make that “this is not financial advice, speak to professional” etc. etc. The reality is that people who come to this blog are likely here as alternative to talking to a financial advisor and at least some of then will basically do what you say.

In the end, we’re all here to help each other so let’s do that, let’s get to the bottom of this DD tax calculation and help make Ireland a more financially literate place 🙂