The taxation of DIRT & LAET
A review on the comparisons and tax treatment of DIRT and LAET
DECEMBER 2018
Department of Finance | A review of the comparisons and tax treatment of DIRT and LAET
Contents
1. Introduction ........................................................................................................................................ 1
2. Deposit Interest Retention Tax (DIRT) and Life Assurance Exit Tax (LAET) ......................................... 1
2.1 Yield ............................................................................................................................................... 1
3. Comparisons between products subject to DIRT and LAET ................................................................ 2
3.1 Introduction .................................................................................................................................. 2
3.2 Fees/costs to the client ................................................................................................................. 2
3.3 Taxation Treatment and Exemptions ............................................................................................ 3
3.4 Risk and return .............................................................................................................................. 5
4. Conclusion ........................................................................................................................................... 6
Department of Finance | A review of the comparisons and tax treatment of DIRT and LAET
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1. Introduction
This paper compares financial products subject to Deposit Interest Retention Tax (DIRT) and
Life Assurance Exit Tax (LAET).
Attention has been drawn to the differential treatment in terms of the rates of tax applied to
DIRT and LAET by interested parties, including the broader insurance industry. It has also been
raised during Finance Bill debates in 2016 and 2017. The issue was considered by the TSG in
2017
1
and this paper expands on the issue in more detail.
The paper provides an overview of both DIRT and Life Assurance Exit Tax; a comparison
between the products subject to DIRT and LAET; and finally draws conclusions as regards to
the comparability of the products.
2. Deposit Interest Retention Tax (DIRT) and Life Assurance Exit Tax (LAET)
Deposit Interest Retention Tax (DIRT) is deducted by Irish Financial Institutions from the
deposit interest paid to accounts of Irish residents. DIRT was introduced with effect from 6
April 1986.
Life Assurance Exit Tax (LAET) is payable on the gain made on a life assurance policy. If a policy
has a return that is greater than the amount invested, that difference is a gain and LAET is
deducted on this amount. The life assurance company is obliged to deduct any tax due directly
from the gain and pay it to Revenue.
2.1 Yield
The yield from both DIRT and LAET has fallen significantly in recent years. The change in the
DIRT yield can in part be explained by the low rates of interest on savings and the decision to
reduce the 41% rate of DIRT incrementally by 2% since 2017 to reach 33% by 2020.
Table 1 – Annual Yield from DIRT/LAET
YEAR
2010
2011
2012
2013
2014
2015
2016
2017
2018*
DIRT
€446m
€473m
€581m
€499m
€435m
€300m
€170m
€118m
€96m
LAET
€31.2m
€43.0m
€43.4m
€58.7m
€130m
€247m
€228m
€184m
€165m
*2018 figures are to end of November 2018.
1
TSG paper 17-11 Capital and Savings Tax, available at https://www.finance.gov.ie/wp-
content/uploads/2017/07/TSG-17-11-Capital-and-Savings-Taxes-Final-PL.pdf (25 August 2018)
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It is not obvious as to the reason(s) for the reduction in the yield of LAET. It has been suggested
that yields from LAET are falling due to the reduction in investment in life assurance products.
However LAET which is being received now is likely to be in respect of taxation on investments
made 8 years ago (assuming that most individuals have treated such products as a medium
to long term investment and have not enchased before the eight year gross roll up period).
The current reduction in yield may therefore reflect the investment market in 2010 rather
than today.
3. Comparisons between products subject to DIRT and LAET
3.1 Introduction
From a policy perspective, one of the key issues to consider is whether financial products
subject to DIRT and to LAET are comparable.
For the purposes of this paper the products subject to DIRT and LAET are compared on the
basis of:
Fees/costs to the client;
Taxation treatment and exemptions;
Risk and return.
3.2 Fees/costs to the client
Deposit products tend to be relatively simple where the relevant amounts are deposited and
do not normally attract fees or commissions. There can be account fees or service charges
levied for transactions carried out on the account or penalties if money is withdrawn in term
accounts. There may also be fixed fees or charges in respect of the operation of current
accounts but current accounts would not be normally regarded as intermediate or long term
savings vehicles.
Life assurance products are generally subject to fees and brokers’ commissions (where the
latter provide advice or other services). These can take the form of annual fund charges, entry
fees, exit fees and ongoing management fees (where they differ from annual fund charges).
The level of fees can also be set as a percentage rate based on the level of investment. There
may also be fees for provision of advice on an ongoing basis. These fees can be levied
irrespective of the performance of the underlying investment. The rates charged also vary
depending on the institution, and products can attract fees ranging from approximately 0.75%
to 2% for product and account management to between 1% and 5% charges on early
encashment
2
.
It can therefore be said that the level and variety of fees charged (by either brokers and/or
life assurance companies) are an indicator of the greater complexity of the life assurance
investment product over deposit accounts. If we are to develop this argument further it is
2
https://www.ccpc.ie/consumers/money/investing/investment-fees-and-charges/ on 23/07/2018
Department of Finance | A review of the comparisons and tax treatment of DIRT and LAET
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possible that investors are likely to consider not just the interest rate to be paid or the
expected rate of return on an investment. They are also likely to consider the rate of return
after costs and fees have been taken into account.
3.3 Taxation Treatment and Exemptions
DIRT is deducted at source, on any interest paid or credited, by the financial institution
holding the funds. DIRT is a “final liability tax” – that is, it satisfies the individual’s full liability
to Income Tax in respect of deposit interest. However, the individual may still be liable to PRSI
on the interest. Deposit interest subject to DIRT is not subject to the Universal Social Charge.
In Budget 2017 and provided for in Finance Act 2016, it was announced that the rate of DIRT
would decrease by 2% each year until it reaches 33% on 1st January 2020.
Table 2 – DIRT Tax Rates
Period Rate Applied:
Standard DIRT Rate
01 Jan 2002 - 31 Dec 2008
20%
01 Jan 2009 - 07 Apr 2009
23%
08 Apr 2009 - 31 Dec 2010
25%
01 Jan 2011 - 31 Dec 2011
27%
01 Jan 2012 - 31 Dec 2012
30%
01 Jan 2013 - 31 Dec 2013
33%
01 Jan 2014 - 31 Dec 2016
41%
01 Jan 2017 - 31 Dec 2017
39%
Since 01 Jan 2018
37%
*Due as of 01 Jan 2019
35%
*Due as of 01 Jan 2020
33%
From 2002 to 31 December 2013 a higher rate of DIRT applied to “tracker type”, or “hybrid”
deposit products where the return on the investment was linked to the growth in a particular
group of stocks or shares.
The reason for this higher rate being introduced was that while DIRT was deducted annually
on standard deposit accounts, tax on these “hybrid” products would not be deducted until a
chargeable event occurred. When the DIRT legislation was being amended to take account of
tracker and other long-term investment products the DIRT rate for these “hybrid” products
was set at the exit tax rate (i.e. the DIRT rate plus 3%) as they were viewed as similar to the
products that suffered exit tax. These “hybrid” products have not been identified as available
in the market in recent years.
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Exemptions to DIRT may apply to individuals aged 65 and over whose total income, including
deposit interest, is below the relevant income tax exemption threshold (€18,000 for single
individuals and €36,000 for married couples/civil partners). These individuals can have
interest paid without deduction of DIRT or can apply for a refund of DIRT deducted (subject
to a four year maximum lookback period). An exemption also applies for permanently
incapacitated persons whose tax credits exceed any tax payable (including DIRT).
LAET is deducted on life assurance policy gains which were written on or after 1 January
2001 (referred to as “new basis business”), the current rate of which is 41% for individuals.
Table 3 - Exit Tax Rates
Chargeable event arising:
Individual
Policyholder (new basis)
Up to 31 Dec 2008
23%
1 Jan 2009 - 7 Apr 2009
26%
8 Apr 2009 - 31 Dec 2010
28%
1 Jan 2011 - 31 Dec 2011
30%
1 Jan 2012 - 31 Dec 2012
33%
1 Jan 2013 - 31 Dec 2013
36%
On or after - 1 Jan 2014
41%
New basis business is taxable under the "gross roll-up” tax regime whereby the investments
are allowed to grow tax-free until such time as a chargeable event occurs. A chargeable
event includes:
the maturity of the policy, including where payments are made on death or disability,
which result in the termination of the policy;
the surrender in whole or in part of the rights conferred by the life policy;
the assignment in whole or in part of the life policy;
to prevent long term deferral of any tax due the ending of an 8-year period beginning
with the inception of the life policy and each subsequent 8-year period beginning
when the previous one ends.
There are currently no exemptions from LAET for Irish resident individuals however a
policyholder to whom the provisions of sections 189, 189A or 192 of the Taxes Consolidation
Act 1997 (as amended) apply (i.e. payments in respect of personal injuries, special trusts for
permanently incapacitated individuals and payments in respect of thalidomide children) can
make a claim for repayment of any LAET deducted.
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3.4 Risk and return
Deposit accounts are considered to be risk free. However the rate of return on deposit
products has fallen significantly. Rates on savings accounts can vary from 0 to 0.10 per cent.
3
It should be noted that term deposits (excluding state savings) attract a higher rate (up to 0.
34% AER on a 3 year fixed account)
4
. The interest earned on deposit accounts is in part a
factor of decisions by the ECB.
Life assurance policies aims to build on the capital invested by investing in assets with the
expectation of generating an acceptable rate of return over time. These products therefore
carry a higher level of risk due to the investment products potential to increase or decrease
in value.
It is difficult to accurately determine attitude to risk when investment decisions are being
made by individuals and the extent to which willingness to accept risk (e.g. possible gains
versus loss of capital) plays a part in deciding whether individuals put savings on deposit or
invest in life assurance products. No body of publically available research which provides
reasons for the decisions made by individuals in their investment choices could be sourced as
part of this paper.
There is some evidence on investor preference from domestic sources. A joint survey is
carried out at regular intervals by the Bank of Ireland and the ESRI – Savings and Investment
Index. This index measures Irish people’s sentiments towards savings and investment and
also aims to capture the sentiment of Irish households towards their ability to save and invest
as well as the broader savings and investment environment.
The Index includes a risk barometer asking households how they would consider using a
windfall of €10,000. The results in October 2018
5
showed that while the percentage of Irish
people indicating they would invest a windfall of €10,000 rose to 32% from 24% in February
2018, generally the report noted that Irish people retain a heavy preference for saving with
67% of respondents saying they would save a windfall gain.
Table 4 below is based on data from the Central Bank of Ireland. It sets out change in deposit
accounts held by individual and households since 2010. Based on that data it seems that
individuals and households are saving more with the banking system.
3
https://www.bonkers.ie/money/ on 26/11/2018
4
http://www.moneyguideireland.com/best-savings-rates/fixed-term-deposits-more-than-1-year on
27/11/2018
5
https://www.esri.ie/pubs/SII2018OCT.pdf on 28/11/2018
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Table 4 – Funds on Deposit
6
Year
2010
2011
2012
2013
2014
2015
2016
2017
€bn on
Deposit
€94.62
€91.31
€92.39
€91.18
€91.44
€94.74
€97.12
€99.49
Furthermore we have no information on investor profiles which may also be a determinant
of willingness to accept risk. There is no public evidence available that suggests that there is
a different investor profile for deposit account over life assurance funds and it may be a
matter of individual preference.
There are no publically available figures which indicate levels of investment in life assurance
products as a comparator in terms of investment trends.
Finally and anecdotally, it is suggested that saving as opposed to investment can also be
driven by;
inertia;
lack of understanding of investing in investment products compared to deposit
accounts;
concerns about capital preservation;
limited understanding of the impact of “real rates of return”.
4. Conclusion
Products subject to DIRT or LAET were considered under three headings;
Fees/costs to the client;
Taxation treatment and exemptions;
Risk and return.
There are distinct differences between deposit products and life assurance products –
particularly in terms of fees charged. It can be said that the fees charged (either by brokers
and/or life assurance companies) reflect the complexity of the products and their
management. In terms of the arguments made to reduce the rate of LAET, there is often little
reference to the costs involved in such investments and the focus has tended to be on
comparing the rates of DIRT and LAET.
6
Central Bank of Ireland, table at: https://www.centralbank.ie/docs/default-source/statistics/data-and-
analysis/credit-and-banking-statistics/bank-balance-sheets/bank-balance-sheets-data/ie_table_a-11-
1_deposits_from_irish_private_sector_-_sector_and_category.xls?sfvrsn=25
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DIRT is chargeable on an annual basis. There are exemptions for DIRT, age related and in terms
of disability, in certain circumstances.
New basis life assurance business is taxable under the “gross roll up” regime and the taxation
regime allows for the investment to roll over for 8 years before it becomes taxable. There are
some circumstances in which LAET can be recovered in conditions of permanent incapacity.
The rate of return on deposit accounts are generally low with slightly higher rates of return
on term deposit accounts. However there is no risk to the capital invested.
Life assurance products can attract a higher rate of return– although the capital invested is
not guaranteed. A low rate of return may not offset the return on a gross rolled up investment
over 8 years even with differential rates of tax. After all 35% or 37% of 0.1% may represent a
poor return compared to 41% of a higher return based on a gross roll up.
In terms of risk and decision making the picture is somewhat unclear and there is no definitive
evidence to guide on decision making by individuals whether to save or invest. The ESRI/BOI
survey and the CBI data suggests a preference for saving as opposed to investing.
Both DIRT and LAET were increased to 41% at the same time. As the rate of DIRT is now being
reduced to 33 per cent it is this reduction which is promoting requests for reductions in the
rate of LAET changes based on the fact that both had previously shared similar rates of tax.
It would seem from the Department’s examination that the products subject to DIRT and LAET
are different in their conception, fees, level of risk, security of capital, and gross roll up versus
annual charges which does not make them totally comparable, notwithstanding that the
same rate of taxation may have applied to them and is not the case now. Therefore as there
are differences in the products, it is not the case that because one tax has a similar rate to
another that they are the same product and the rates are of necessity linked and should be
reduced in tandem.
It is difficult then to accept the view that it is the specific rates that apply to DIRT and to LAET
which are the main factor in determining whether or not individuals invest in deposit products
or life assurance products.
An investor is likely to consider all the factors, including capital preservation, costs and
charges and expected rates of return before investing. No specific evidence has been put
forward that it is the different rates of LAET and DIRT which is the most significant factor for
this, nor has any evidence been provided as to the motivation of investors. Indeed there has
only been reference to the rates of LAET (and Stamp Duty) and DIRT with little or no reference
to the other costs inherent in one set of products compared to the other.
It is also unclear in the absence of evidence to the contrary that investment in life assurance
is diminishing as a result of the different rates of taxation applied to it.
Department of Finance | A review of the comparisons and tax treatment of DIRT and LAET
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