Gintax answers Sunday Independent readers’ questions on tax.
Article published on 28 February 2021

Q - Investment in a UK Fund in the 1990s by Irish individuals

We are a married couple, both 64, Irish citizens and residents, PAYE taxpayers. My question is about the tax that would apply now in 2021 if we sold part or all of our holding in a UK fund which we purchased jointly in 1997, via an Irish fund manager, from after-tax PAYE income.

We have not received any income or dividends from this investment, having left the original investment to the fate of the markets since we bought in 1997. Is the eight-year deemed disposal rule applicable to this investment, seeing as the investment was made in 1997 and deemed disposal was only introduced years later in the 2006 Finance Act?

We understood all along that Capital Gains Tax applied, so we thought we could perhaps do a partial encashment over a number of years and use the €1,270 CGT annual allowance for both of us to offset against any tax owed.  Is indexation relevant to this 1997 purchase as a way of increasing the cost base and reducing any taxes due on disposal?

If one of us were to pass away, for the surviving spouse, would the inherited half of the investment be rebased to the value of the investment at the date of death, or does this only apply to an investment if the relevant tax is CGT ?  Has Brexit changed anything as regards tax for this investment ?

Any answer here needs to be prefaced by noting that the Irish tax rules surrounding foreign funds are complex.  A special “Offshore Fund” tax regime can apply and even within this regime there are varying but crucial nuances.   Analysis of the law here is usually aided with a flow-chart!  

Your case is rather unusual as the fund was purchased many years ago.  The Offshore Fund regime was introduced in 1990 and I would have thought that a 1997 UK Fund investment would fall squarely within the regime.  However, you understand “all along that Capital Gains Tax applied” and this comment should give any adviser pause here.  At the very least, the underlying documentation would now need to be carefully considered to confirm the classification. 

If outside the scope of the regime, then ordinary Irish tax rules apply; which means that CGT at 33pc will arise on any gain on ultimate disposal.  No CGT will arise on death.

If within the Offshore Fund rules, then CGT is no longer relevant and instead all gains and distributions are within the scope of income tax.  A blanket income tax rate of 41pc applies to gains (usually termed an “exit tax”) and distributions from such funds.  No USC or PRSI should arise. 

An advantage of many funds is that like pensions, they offer gross roll up which means there is no (or limited) tax within the fund and instead tax arises at level of the investor.  Historically, an Irish investor could defer a tax liability by allowing an investment to accumulate over years as profits were reinvested within the fund.  This changed in 2006 with the introduction of deemed disposal rules and at the end of every eight years of ownership, the “exit tax” will apply to unrealized gains by the investor.  This can cause difficulties as some individuals tend to plan for tax liabilities only on realized gains.  In any case, these “deemed disposal” rules only apply to funds acquired on or after 1 January 2001.  Accordingly, given that your acquisition was in 1997, these should not be relevant here.

One of the additional quirks of Offshore Fund treatment is that death triggers the exit tax.  Helpfully, this exit tax may be available as a credit against Capital Acquisition Tax (CAT) payable by the beneficiary.  It may not be particularly tax efficient for such funds to pass to a surviving spouse as the benefit of the exit tax credit in that scenario is lost.  If the fund were to pass to a spouse on death, then exit tax will apply and the recipient will be deemed to have acquired it for market value at that time.  This new holding may come within the eight-year deemed disposal regime and this aspect would need to be checked.

Furthermore, no indexation relief is available albeit even for ‘ordinary’ investments, indexation has limited benefit as it does not apply from 2002 onwards.  Similarly, the annual CGT allowance of €1,270 is not available to reduce Offshore Fund gains.  

Brexit has no Irish tax impact here as the UK remains a Tax Treaty/OECD member and the same rules apply to funds in these jurisdictions as the EU.  My comments in this answer only relate to Offshore Funds located within these counties and assumes you (or a connected party) had no influence over the Fund’s selection choices.  As noted above, Offshore Funds are complex and there can be further nuances depending (for example) on the type of fund, location, and client circumstances.

As a general point, the consequences for non-compliance associated with any foreign investments can be significant.  This is because when regularizing affairs, generally taxpayers can avail of a special “Qualifying Disclosure” process which has benefits such as reduced penalties.  This facility is not available in respect of offshore matters. 

In summary, the key takeaway for you is that no Irish tax should have been triggered to date.  In due course, you will need to formally confirm the Irish classification of the Fund, as it will determine the tax treatment of any gain.   This treatment can be summarized as 41pc tax on disposal or death (Offshore Fund regime); or alternatively 33pc CGT on disposal with no CGT on death (ordinary tax rules).