Taxation of Overseas Investments
By Marc Westlake
Published on: April 6, 2023
Back in 2013, following a rise in exit tax, we took the opportunity to switch our client’s portfolios. The increased exit tax rate, from 36% to 41%, meant that a move from ‘gross roll up’ investments made sense. We shifted to a regime of general principles of tax (income tax and CGT) to take advantage of the lower rate of capital gains tax (33%) and the more progressive rates of income tax with reliefs and exemptions.
There are significant tax benefits to this approach for many of our clients, particularly for those in retirement.
However, at times over the last decade it has felt like a running battle to keep our client’s portfolios in the generally more favourable tax regime.
Updated Revenue Guidance Notes
On 1st September 2021, Revenue updated guidance notes in relation to Exchange Traded Funds (ETFs) within the Revenue e-brief 164/21.
I was asked to comment in the Sunday Times on this update in this article.
In summary, with effect from 1st January 2022, Revenue removed their guidance note from April 2015. This guidance had previously confirmed that certain investments, including non-EU ETFs, were “outside of the tax regime attaching to investment funds” and therefore were subject to CGT and Income Tax treatment.
“Prior guidance confirmed that investments in ETFs domiciled in the USA, the EEA or in an OECD member state (other than the USA) with which Ireland has a double taxation treaty, follows precisely the treatment that would apply to share investments generally. That confirmation does not apply to such investments with effect from 1 January 2022.”
The burden is now back on the individual taxpayer to determine the tax treatment for the instruments they hold. Unfortunately, what was previously a fairly black and white matter is again an area of some confusion and requires further interpretation.
The key point from Revenue in this matter is the comment that; “there was very little assistance that Revenue could provide to simplify such a complex area of legislation.”
Revenue is admitting that it cannot provide guidance because this is so complicated and; “absent a complete overhaul of the offshore funds regime, there was no way of simplifying the tax treatment for investors or advisors.”
Arguably that’s the real answer here. Fix the legislation and make it so that it is easier to administer and file.
Current System Changes
Until the current system changes, as always, each investor must seek their own tax advice under a system of self-assessment.
We cannot provide formal tax advice to investors. However, given the wide-reaching impact of this change in Revenue practice we have sought to act proactively. We have obtained an opinion from our Tax Adviser in order to assist our clients. A copy of this tax opinion is provided to our clients as part of the implementation of their portfolio.
In summary, our adviser is of the view that the US ETFs used in our portfolios are materially different from Revenue’s definition of ‘funds’ and therefore, while it is never possible to guarantee the tax treatment of an ETF, in their view the US ETFs can correctly be categorised as a CGT, rather than a fund, investment.
However, Canadian ETFs, in their view, are taxable as funds (exit tax) from 1st January 2022.
We were previously using Canadian ETFs due to the risk of owning US investments, read more here. However, we ensure that the US Estate Tax issue is proactively addressed by holding assets in sole names rather than joint names and allowing the creation of a post-death US Qualified Domestic Trust.
Where US ETFs are unsuitable, we have also developed a range of Portfolios of UK Investment Trusts. Again, we have obtained a tax opinion on the underlying investments used in these portfolios so that we can be as confident as possible that they are fit for purpose.
Schedule a call with one of our advisers to discuss your investment portfolio and its tax efficiency
