Time To Fix Investment Fund Tax

In this article, Kevin Elliott, CFP® — a Certified Financial Planner™ with nearly two decades of international experience — explains why reform is overdue and outlines practical steps such as scrapping the eight-year deemed disposal rule, aligning exit taxes with capital gains, and allowing limited loss relief.

Kevin has held senior roles at Bank of America and Bridgewater Associates, specialising in investment design, risk, and wealth planning. Now based in Ireland, he helps families and business owners grow and protect their wealth, bringing global insight to local challenges.

Introduction

Ireland says it wants households to invest for the long term. Its tax code says otherwise. Budget 2026 is the obvious moment to resolve that contradiction by reforming two uniquely Irish frictions on mainstream funds: the eight-year deemed disposal and the 41% exit-tax that applies to UCITS, ETFs and many life-wrapped products.

Households are still sitting on roughly €163 billion in deposits, much of it on demand. With inflation nibbling away at real value, that cash bias hurts savers and starves domestic capital markets of long-term money. The Department of Finance has already acknowledged the issues and mapped a cure. The question is no longer whether to reform, but how quickly.

What the Rules Actually Do

For Irish-resident individuals in Irish or EU/EEA UCITS and similar regulated funds, returns fall under the gross roll-up system. Gains are hit with 41% exit tax when there’s a “chargeable event” such as a distribution, redemption or switch. Every eight years there’s a deemed disposal - a tax bill on paper gains even if no sale occurs. Losses can’t be set against other gains or income.

Direct shares and most non-EEA ETFs sit outside this regime. They’re taxed under CGT at 33% on sale, with a €1,270 annual exemption, loss relief, and no eight-year timer. For an ordinary saver comparing “funds vs shares,” that asymmetry is doing a lot of the behavioural work.

Why it Feels Punitive in Practice

The rate is higher: 41% on fund gains versus 33% for shares. Over time, eight percentage points is not a rounding error - it compounds into meaningful drag, especially when you can’t use the CGT allowance.

The timing is arbitrary: on each eighth anniversary the law pretends you sold and re-bought, so you can owe cash without selling. If markets fall in the following year, there’s no refund - only a credit carried forward within the same regime. That’s why deemed disposal is often described as a tax on a memory.

And the symmetry is missing: losses inside the fund regime don’t generally shelter other gains or income, whereas share investors can harvest losses. The regime penalises diversified, pooled investing relative to stock-picking.

How the Rules Shape Behaviour

You can see the fingerprints. A large deposit pile persists because cash feels safe, even as purchasing power erodes after tax and inflation. Shares get friendlier treatment under CGT, nudging savers toward concentration in a handful of names or into property - precisely when educators and policymakers want people using diversified funds. ETFs should be part of the solution, yet Irish households’ direct adoption remains low, with the tax treatment and compliance frictions frequently cited as barriers.

A Real Life Example

Hold everything constant and change only the tax regime. Assume a single €10,000 contribution, 5% annual total return, no dividends (to isolate tax mechanics), and a 24-year horizon.

• Direct shares (CGT): €10,000 × 1.05²⁴ ≈ €32,240. The gain is about €22,240. After the €1,270 allowance, the taxable amount is roughly €20,970. CGT at 33% is about €6,920, leaving ~€25,320 net.
• UCITS fund (exit tax + deemed disposal at years 8, 16, 24): the 41% charge lands on the gain at each of those points, interrupting compounding. After three charges, the net value is about €21,056.

That’s a ~€4,300 gap created not by markets but by the higher rate and the calendar-driven tax that clips compounding. If markets dip soon after a deemed-disposal date, the gap can feel harsher still - hence “tax on a memory.” Real-world outcomes will vary with returns, dividends and timing, but the direction of travel is clear.

The Department of Finance Already Diagnosed the Problem

In October 2024, the Department of Finance’s Funds Sector 2030 review concluded that the current mesh of fund, offshore-fund and life regimes is complex, distorts choices and lacks neutrality versus other savings products. After consultation, it recommended three headline fixes for funds (with parallel changes for life policies): remove the eight-year deemed disposal, align the exit-tax rate with CGT (currently 33%), and allow limited loss relief. For life products, it also proposed removing the 1% levy.

Two points from that review deserve emphasis. First, abolishing deemed disposal changes the timing of receipts, not their scale: the Exchequer still collects when investors actually sell. Second, reform can be phased and paired with guardrails - such as tighter personal-portfolio rules - to deter misuse while simplifying compliance.

The Fiscal Optics Versus the Substance

Investment Undertakings Tax (IUT) and Life Assurance Exit Tax (LAET) raise hundreds of millions a year, not billions. Against total receipts- and next to corporate-tax volatility - the Exchequer risk is modest. Much of the perceived “cost” is a working-capital effect from shifting recognition to real disposals instead of a fixed anniversary. Add the likely participation and compliance gains from a simpler, neutral regime, and the case for action strengthens rather than weakens.

What a Credible Budget Package Should Include

Reform does not need to be dramatic to be effective. Prospective abolition of deemed disposal for funds and life policies, with transitional credits for recent charges, would remove the most jarring timing risk. Aligning the rate to CGT (33%) restores neutrality. Limited loss relief within the regime stops fund investors being structurally penalised versus share investors. The 1% life levy on new contributions can be taken off the field. Implementation can start with investment funds, tidy up ETF self-assessment frictions, and simplify offshore-fund rules, while anti-avoidance provisions are strengthened, not weakened.

This is, in effect, the Department’s own roadmap.

Bottom Line

Ireland’s existing fund regime penalises diversification, taxes gains on a calendar, and blocks loss relief - pushing households toward cash and concentration just as the State wants broader market participation. With around €163 billion still parked in deposits and a coherent reform plan already on the table, Budget 2026 is the time to act. Remove deemed disposal, align the rate with CGT, and allow limited loss relief - phased, guarded and focused on neutrality. Replace a tax wedge that punishes good behaviour with a system that helps ordinary savers own productive assets safely, simply and for the long run.