Swedish government proposals to tax investments held within so-called investeringssparkonto (ISK) investment savings accounts that act as tax wrappers, have been condemned by the Swedish Investment Fund Association (Sifa), as posing a threat to what has become one of the most popular ways to engage in long term savings in the country.
Some two million accounts have been opened in the past five years – according to figures from the Swedish Tax Agency cited by Sifa – a significant number for a total population of some 10 million people.
As noted by Sifa CEO Fredrik Nordström (pictured), account holders include men and women across all ages and income groups; the ISK regime has also encouraged “a significant lowering” of fees paid.
“A clear trend since ISK was introduced in 2012 is that capital has above all left older and more expensive allemansfonder and instead gone to lower priced funds. Add to that the fact that the account is one of the few that is always free to the customer,” Nordström said.
Currently, tax is applied at a flat rate on investments held within the ISK account wrapper. Proposals to increase the rate of tax applied fails on two points, Sifa argues: firstly it harms confidence in long term savings, and secondly it does nothing to address the particular imbalance in personal finances that has developed in Sweden, in which households are significantly leveraged and indeed encouraged to increase borrowings as they can offset tax due against interest rate payments.
The tax proposal has sparked immediate reaction from a number of sources. One petition saw over 15,000 people sign up over two days – https://www.skrivunder.com/ror_inte_mitt_isk-konto
Savings specialist Joakim Bornold at Nordnet, the online investments and savings provider accessible across the Nordic region, warned that bond and balanced funds should be removed from any ISK account going forward because the returns they typically provide will make them undesirable once the proposed tax regime changes take effect.
The change has been included in the ruling coalition government’s proposed budget for 2018, which would see the benchmark interest rate used to calculate the flat rate of tax applied to capital held within the ISK wrapper. The benchmark is to be increased from the government borrowing rate +0.75% to the government borrowing rate + 1%.
Although the ultimate rate used to tax returns from funds held within the ISK wrapper may in certain cases remain better than the rate of tax applied to gains from sales of fund shares when not held in the wrapper, the point of ISK, to encourage long term savings, means that fund holdings may not be traded that often in any case, which means the increased flat rate tax may have relatively larger impact as interest rates rise versus returns from, for example, fixed income funds.