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Sunday, 14th July 2024
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New tax regimes have been introduced for life assurance products and other unitised investment products. They provide a single tax code for these products both in the IFSC, and nation-wide.
Currently both unit trusts (and other collective investment undertakings) and life assurance each operate under two separate regimes. In the IFSC (where unitholders and policy holders are largely confined to non-residents) the fund is a gross fund. It is not subject to Irish taxation. The unitholder and policy holder is also exempt from Irish tax, thus providing a product entirely free of Irish tax.

In contrast, a life policy or unit in a collective investment undertaking issued in Ireland outside of the IFSC (and therefore available to residents) is liable to an internal tax charge at the standard rate of income tax. However apart from that the product is free of tax in the hands of the policy holder or unitholder.

New country-wide system

A new unified system is being introduced both for life assurance and for collective investment undertakings. It will cover both the IFSC and the non-IFSC sectors. Because it is a single unified system, it should be proof against EU objections in relation to special tax breaks.

The new unified system will apply to new life assurance policies issued after 31 December 2000. It may also apply to policies issued on or after 1 April 2000 by life assurance companies newly commencing business on or after that date. The new regime will apply from 1 April 2000 to all special specified collective investment undertakings in the IFSC, regardless of when they issue their units, and to all active investment undertakings who first issue units on or after that date. It will not apply to collective investment undertakings outside the IFSC who had already issued units prior to 1 April 2000. Those collective investment undertakings will remain subject to the old regime indefinitely.

The new regime provides for a gross fund, as does the existing IFSC regime. In other words, no Irish taxes are directly levied on either the life assurance fund or the collective investment undertaking fund. In principle there are no taxes levied directly on the unitholder or policy holder but he does effectively bear tax when he receives a payment from the life assurance company or collective investment undertaking, or disposes of his policy or units otherwise. This is a withholding tax operated by the life company or collective investment undertaking and is the only tax which arises in relation to the unit or policy.

Non residents who have made an appropriate declaration are exempt in relation to this withholding tax. This exemption for non-residents means that IFSC funds can operate much as they are at present, offering products free of Irish tax. Additionally, Irish life companies and collective investment undertakings outside the IFSC will now be able to offer a similar product to non-residents.

'Withholding tax'

The withholding tax that will apply in relation to resident persons is set at a rate of 3 per cent over the standard rate of income tax. When the new system comes fully into operation in 2001/2002, that rate may well be as low as 23 per cent, although currently it would be 25 per cent. This compares with a 20 per cent CGT rate that would apply to a person holding equities directly and realising a gain on their disposal. It also compares with a 44 per cent income tax rate applying to dividends etc received from equities held directly. The unitised products are therefore somewhat more expensive in relation to gains, but a bargain in relation to income. More importantly under the new rules the tax liability can be effectively deferred until such time as the policy or unit is disposed of or otherwise drawn upon. The taxpayer has a choice over when tax will arise. This is more feasible than if a portfolio of shares is held directly, and actively managed.

The changes to life assurance and collective investment undertakings, although driven by EU concerns in relation to the IFSC, do produce a regime that is in many respects comparable to the newly introduced pensions regime in relation to alternative retirement funds. The basic concept of a gross fund until cash is drawn from it underlies all of the new tax regimes. However the tax cost on cash withdrawals from an alternative retirement fund can be different, and is generally higher, than exiting from life assurance or collective investment undertakings.

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