PRIIPs problem prompts a rethink and a change in newsletter name and emphasis
Why I can no longer recommend investment trusts as a superior vehicle for Irish investors - for now at least
Previously I wrote about potential issues UK divergence from EU regulations could cause for EU residents who wish to invest in investment trusts. Essentially, my concern was that should EU-compliant documentation no longer be produced by brokers/fund providers and made available to investors, EU brokers would no longer be able to offer investment trusts to EU residents (or UK-based brokers to EU residents, such as ex-pats retired abroad).
Since that article was posted, I have contacted a number of investment trust boards and investment managers. Essentially, the general answer I have received is that my concerns are legitimate, it is something they are seeking further advice on but that at this point they do not know what will happen (for non-UK residents) on 1 January 2023 when the FCA’s new PRIIPS rules will take effect and the KIDs in relation to UK and EU AIFs will diverge.
It seems very clear to me what can be expected to happen unless something changes - shares in UK-listed investment trusts will no longer be available for EU residents to purchase from the start of next year. This uncertainty clearly undermines my own intended investment approach for the coming decades - namely periodic investments into various investment trusts.
I set this newsletter up to try and share my own investment approach and journey over the coming years in the hope that it may be of help to others and serve as something of a counterpoint to those encouraging gambling in crypto, NFTs or overhyped growth stocks. Investment trusts have been and were planned to continue to be, the central plank of my portfolio. While investors can clearly still make disastrous mistakes in their selection of investment trusts, I felt they were the superior vehicle for Irish residents, compared to open-ended and passive funds, due to their respective tax treatment. Certainly superior to individual stock picking, which rarely seems to end well for most private investors, certainly those new to the practice.
UK investors don’t know how lucky they are
Irish investors in open-ended funds (including ETFs) are subject to a “deemed disposal” tax on unrealised gains of 41% every eight years (as well as on exit). In addition, it should be noted that this is not the normal Capital Gains Tax, but rather an Exit Tax, and thus cannot be offset against gains elsewhere. With these administrative and tax burdens I was of the opinion that most Irish investors would be better off avoiding open-ended funds outside of pension wrappers. Up stepped investment trusts. Whilst the Irish Revenue has never made a definitive pronouncement (and nor am I!) there is a solid argument, with decades of precedence, that investment trusts are treated the same as normal shares for tax purposes - that is, dividends are taxed as income and CGT of 33% is due on any gains upon sale. Much simpler and a far better setup to enjoy the benefits of compounding over the long term.
But what now?
Given that there is a probability that investment trusts will no longer be available to Irish investors from the end of the year, it is clear that I will have to completely reevaluate my approach and look beyond investment trusts, toward open-ended funds and (gasp) even individual stocks. As such, you will notice that the newsletter has undergone a name change to reflect a wider remit. While I will still discuss investment trusts (hopefully something will change and I will still be able to purchase shares in investment trusts next year) my investment approach and journey will have to broaden to include open-ended funds/ETFs and also individual stocks - future posts will reflect that. I have a lot of learning to do, and I am looking forward to sharing my journey with you all - hopefully, you will pick up some helpful information along the way.
Hi, how will this impact Irish investors currently holding investment trusts? Will they still be able to hold and sell them in the future?