Ordinary investors will be relieved that the penal tax treatment of exchange-traded funds (ETFs) looks set to change. Currently, unlike with individual stocks, you can’t offset ETF losses against gains elsewhere. Additionally, deemed disposal rules mean investors must pay a 41 per cent exit tax on ETF gains after eight years, even if they have not sold the fund.
It’s a bizarre system, one that encourages people to make risky bets on individual stocks or simply to leave their savings rotting in low-rate deposit accounts. The rules, as Davy’s James Costello notes, discourage investors from making diversified long-term investments.
Accordingly, Davy and other financial professionals have welcomed a Government review into the funds sector that recommends the abolition of deemed disposal and a cut in the rate of tax from 41 to 33 per cent.
Change is indeed welcome, but investors will be disappointed to see no mention of an Irish ISA (individual savings account). Former British chancellor Gordon Brown brought in tax-free ISAs way back in 1999. They replaced a similar scheme – Personal Equity Plans or PEPs – which were introduced in the 1980s.
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That aside, change isn’t certain and won’t be coming any time soon. Minister for Finance Jack Chambers is recommending the report be embraced by a “future finance minister in the next government”. Additionally, the Department of Finance says the “roadmap to simplification is not straightforward and could take a few years to implement, if agreed by the next Government”.
The recommended changes are long overdue. The sooner they are implemented, the better.
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