Mike
Key Highlights:
Government Plans Tax Reforms: Minister for Finance Michael McGrath announces upcoming changes to make investing more attractive in Ireland.
Current Issues: The deemed disposal rule and lack of investor-friendly vehicles are major obstacles for Irish investors.
Potential Improvements: Anticipated reforms could introduce an ISA-like scheme and eliminate deemed disposal, boosting the investment landscape.
Ireland’s Outdated ETF Laws
Great news for our Irish readers who have long been frustrated with the country’s prohibitive tax laws when it comes to investing. Last week, Minister for Finance Michael McGrath announced that the government is looking to make changes to the tax law to make it more attractive for people to invest their savings.
McGrath highlighted a key issue:
“We have over €150 billion of household deposits in Ireland and that funding is largely asleep. It’s earning little or no return, it is sitting in instant access, overnight or current accounts. I’d like to see a significant share of those funds being put to more productive use in the economy, investing in structures that help to fund and support early-stage and innovative businesses. People should not be ‘penalised unduly’ for trying to ‘put their money to work,’ he said. ‘I do think tax has a role to play and I would anticipate making some changes,’ he said.”
Ireland’s current tax system presents many obstacles for investors. One major issue is the deemed disposal rule for ETFs, which dictates that every eight years will be a taxable event, regardless of whether you have sold your holdings or not. This rule discourages long-term investing and there are no investor-friendly vehicles like the Roth IRA in the U.S. or the ISA in the UK that promote investment.
The lack of these options has driven people towards property investment as the only viable way to put their money to work. While stock picking can be a full-time job, passively investing in ETFs is a more accessible option for many. However, the current tax rules make this difficult.
Many hope these tax reforms will bring actionable changes to Ireland’s investment landscape. Such changes could redistribute investment control away from a few big pension funds and potentially ease the property crisis by providing more investment choices
Irish Taxes on Investing
The current system, particularly the deemed disposal rule, hampers our ability to fully benefit from passive investing. This situation benefits major life insurance companies and pension providers, as there is no real alternative to the pension route for tax-advantaged accounts. Consequently, many turn to property investment, exacerbating the housing crisis.
To understand how far behind Ireland is in terms of investment opportunities, let's look at other countries. In the U.S., individual retirement accounts (IRAs) allow Americans to grow their investments either tax-free (with a Roth IRA) or tax-deferred (with a traditional IRA). Contributions are capped at around $7,000, and the key advantage is that investors are taxed only once. The UK has a similar system with Individual Savings Accounts (ISAs), and Canada has Tax-Free Savings Accounts (TFSAs). These systems empower citizens to invest, while Ireland’s system does the opposite.
A Light at the End of the Tunnel
Fortunately, there may be a light at the end of the tunnel. A Department of Finance review of the funds sector has found that the current tax system makes investing unattractive in Ireland. Minister McGrath is looking to reform tax law to change this.
"People should not be 'penalised unduly' for trying to 'put their money to work.'"
McGrath reiterated this point in the Dáil. He noted that Irish savers and investors do not invest in as broad a range of products as those in many other Member States. While we don’t know the exact details yet, McGrath indicated that we might see an announcement this summer. We hope for the elimination of the deemed disposal rule and the introduction of an ISA-like scheme. Both would be significant changes, but any improvement will be a positive step for Irish investors.
If you want to stay updated on these developments, be sure to listen to our Stock Club podcast.