‘Like North Korea or Russia’: Investors have their say on Ireland’s tax regime

Despite the arrival of low-cost, easy-access investing apps in Ireland, the current tax regime – which features deemed disposal, high tax and low capital gain tax-free thresholds – means that investing remains far more challenging than it ever should be.

There is a certain irony in the fact that the Government recently launched a national strategy on financial literacy while having an investment taxation regime that makes applying this financial knowledge extremely difficult.

Not only that. While Ireland is one of the world’s leading homes for exchange-traded funds (ETFs) thanks to its International Financial Services Centre (IFSC) – it authorised the first ETF back in 2000 and some €1.5 trillion in such products are now domiciled here – from a tax perspective, ETFs are just not attractive for the typical Irish investor.

Change, we have been told, is coming – and not before time.

‘I am at a loss as to how €5,200 goes missing’: PTSB customers say refunds disappeared without a trace

A crypto tall tale: one analyst’s not-so-subtle allegory punctures the financial fairy story

My aged mother’s health is declining quickly. Should we prepare her home for sale?

Following a consultation on the tax treatment of funds back in 2023, the new programme for government has now committed to “progressing and publishing an implementation plan for consideration in Budget 2026”. Moreover, Minister for Finance Paschal Donohoe told the Dáil last month that he will “consider the next steps in this regard over the coming months”.

But if you’re wondering just how much the current rules have acted as a barrier to investing for Irish residents, consider the responses to that Government consultation, which were published at the end of last year.

They suggest that Ireland is “actively hindering its citizens from building wealth and securing their future”.

***

Overall, the consultation received almost 200 responses; of these, a staggering 140 responses came from individuals, showing just how frustrated Irish investors are.

All sorts of people responded: one who is thinking of leaving Ireland for a more investment-friendly country; another, “a young single person”, who can’t afford to buy a house and is being frustrated in his efforts to save to achieve this by rules on ETFs; another has a young family, and a son with an intellectual disability, “meaning I need to be able to provide for him in my retirement too”.

One of the main issues is how the current regime is influencing investor behaviour.

The old saying goes, “don’t let the tax tail wag the investment dog”. However, time and again, the submissions show that current rules are having a big impact on how people invest – and not always in a way that might benefit them.

For most investors, it seems this means avoiding ETFs – one of the most popular and widely promoted investment vehicles the world over, as they offer low-cost access to a huge number of investment opportunities.

In Ireland, the current regime seems “designed to deter individual investors”.

As one wrote, “due to Ireland’s 41 per cent tax and deemed disposal, I do not invest in ETFs. Instead, I invest some money in risky stocks and have a lot of money wasting away in a very low-interest savings account”.

Another said: “Almost all my investment decisions are driven by tax concerns and avoiding the gross roll-up regime.”

Consider one investor’s experience.

“In a tax-free world, I would invest in approximately five different ETFs covering different geographies and style (values, growth, etc.). However, currently, I avoid all ETFs because of the 41 per cent exit tax – which means I am buying riskier single stocks, and riskier investment trusts (with higher management fees).”

And another: “I do not invest in ETFs. Instead, I invest in UK investment trusts like JAM and FCIT. These are the closest thing available to ETFs which fall under the CGT [capital gains tax] regime. To me, these are inferior products in comparison to ETFs in almost every way.”

Deemed disposal

A feature of most responses was the desire to abolish the deemed disposal regime.

Deemed disposal dates back to the introduction of a “gross roll-up” regime for Irish funds in 2001 to bring them into line with elsewhere in Europe. Before that, the gains in funds were subject to tax annually at the then 22 per cent rate of deposit interest retention tax – again regardless of whether they were exited or not.

After 2001, funds could roll over gains with those gains ultimately being subject to an exit tax when they were crystallised. At that time, the exit tax was 25 per cent, with the extra three percentage points designed to compensate Revenue for giving up the right to tax annually.

In 2006, in response to concerns about tax avoidance through indefinite roll-up or simply because Revenue found it was leaving a big hole in the exchequer finances – whichever you believe – deemed disposal was introduced which applied that exit tax to fund gains every eight years regardless. To exacerbate things, the rate of exit tax has jumped from 25 per cent to 41 per cent over time.

“It’s a policy more suitable to a place like North Korea or Russia, and even they don’t do this,” said one respondent.

Another described it as being “catastrophic”, due to the amount of pocket money needed to cover the tax amount for larger investors, and “highly inconvenient” for occasional investors due to the necessity of keeping track of the purchase dates. Another said it was “borderline absurd”.

It also makes it difficult to invest in ETFs every month.

One respondent gave the following example:

“Let’s say an investor is investing €200/month for 20 years. This is 12 “buys” per year. After year eight, they have made 96 purchases. On year eight, do they just pay the deemed disposal for the first 12 purchases? Do they pay the deemed disposal for all 96 purchases? Do they have to make 12 payments on the anniversary of each purchase? These questions are surprisingly unknown from my experience.

“Next, on year 16, they have made 192 purchases. The same questions stand. This calculation is becoming unmanageable, quickly. When do they pay this tax (January or December)? What if they make a calculation error? Can accountants calculate this sum correctly? Then, they sell up on year 20 when they have made 240 purchases. They will hope they have grown their investments.

“But what if they have not? How can paid tax be returned? Why can’t losses in other ETF investments be offset against gains? How can they know that they did their >200 calculations correctly? They unfortunately cannot.”

Another issue is that the exit tax which applies at deemed disposal – and at any eventual sale of these investments – is levied at a rate of 41 per cent, “significantly higher than CGT on stock gains”, which is at 33 per cent. Moreover, losses cannot be offset against gains, unlike assets which are subject to the CGT regime.

The higher cost of investing for people deterred by deemed disposal is also a problem. A typical life-wrapped product will charge at least 1 per cent a year, but, as one respondent notes, you can “find ETFs with fees as low as 0.12 per cent (a year) as opposed to the much higher fees charged by the pension brokers.”

CGT

Many respondents also called for a harmonisation of investment tax with the capital gains tax regime. This would mean a rate of 33 per cent, with losses allowable against gains.

It was also suggested that the current tax-free allowance of €1,250 should be increased to a “meaningful” level, and indexed to inflation (although this is against the trend in the United Kingdom, which recently cut its allowance from £12,300 to £3,000).

The somewhat odd €1,270 figure has its root in pre-euro days when the allowance was £1,000 which shows how long this threshold has been in place unchanged.

The taxation of dividends proved to be a bugbear for many, pointing to the fact that marginal taxes apply.

As one investor noted, “having Dirt at 33 per cent and dividends at 52 per cent seems genuinely outrageous to me. I avoid dividends like the plague!”

Savings on deposit

Respondents also expressed the view that the current investment regime deters people from investing and sees them keeping money in low-paying deposit accounts. Recent Central Bank of Ireland figures show that just under €160 billion of household savings are on deposit, although this figure includes almost €70 billion held in current account. Of the balance, more than €68 billion is in demand deposits.

“Too many people are missing out on opportunities as they are leaving funds in deposit accounts with next to zero per cent return,” noted one, while another added that it leads to “less incentive for younger people to save for house deposits”.

No wonder then that, according to respondents, property remains to the fore of many Irish people’s minds despite its challenges as an investment.

“It’s so much harder to build personal wealth in Ireland compared to other comparable countries. Ireland should be a place where Irish/Europeans can build wealth without investing only in property,” wrote one, while another said: “Property seems to be the be all and end all for Irish people.”

Taxation of life assurance products, which are also subject to exit tax and deemed disposal, did not escape the attention of individual investors either.

In addition to the 1 per cent insurance levy, investors complained about the charges levied on such funds, noting that the customer is paying for products to be “tax collectors for Revenue”.