An Irish Times guide to the world of personal finance

In October 1997, my partner and I paid a deposit on a new house and in January this year we signed the contracts. The house is now complete and we are due to move in shortly. We had intended renting a few rooms to help with the mortgage payments for the first few years. Does the Bacon Report affect us regarding mortgage interest relief, rental income, etc?

Mr T.K. email

The key element of the equation as far as you are concerned is the date on which contracts were signed. It appears, from what you say, that you would not be affected by the Bacon report as your contracts were signed in January, well before the report came out in mid-April.

The provisions in the report would certainly have an impact on mortgage interest on rental income in relation to investment properties but the Government, while acting swiftly to implement the provisions of the Bacon Report, said it would not be doing so retrospectively.

Under tax law, prior to April 23rd, you could claim a deduction from gross rent for any of the following that might be applicable:

ground rent;

rates;

actual cost of maintenance, repairs, insurance and management fees;

wear and tear on furniture and fittings;

the interest on borrowings used for the purchase, improvement or repair of the premises.

In your case, this means that the mortgage interest would be allowable. It would be broken down into that portion claimable as a normal interest credit against your personal income tax and the balance, which would be claimable as a deduction against gross rental income. In working out the relevant portion of the mortgage allowable against rental income, the Revenue Commissioners say it may be determined on a "just and reasonable basis". What this means in practice is that the proportion of the house let out may be taken to be the portion of the interest allowable against rental income.

Subsequent to April 23rd last, the portion of mortgage interest which could previously be claimed against gross rental income can no longer be so claimed.

While this might cause you some concern as you tell me you are only moving into the house, you should still be covered under the transitional arrangements in the new Finance Bill subsequent to the Bacon Report. These state that although you moved into the house subsequent to April 23rd and, presumably paid the balance of the purchase price subsequent to that cutoff date, the contracts were signed prior to the April 23rd cut-off and the balance of the money paid before December 31st coming.

It would, however, be worth checking the precise liability with an accountant as changes of use subsequent to April 23rd appear to come under the new restrictions. Whether your case could be argued to be a change of use or not is a grey area. Had you been in the house prior to April 23rd and, subsequent to that date, decided to let out a number of rooms, you would certainly appear to come under the new rules. Having been in a different situation - where it was the intention at the time of purchase to let out some rooms, I would argue that no change of use has occurred. Your accountant and the Revenue might see it differently.

Can you clarify the Revenue position on a gift of £500 to a child. Is the child allowed one gift only per annum or can parents, grandparents or others also gift to the same child? In other words is there a ceiling of £500 per annum?

Ms A.C. email

There is an important difference between a person's tax-free inheritance/ gift tax threshold and the annual tax free allowance on inheritances/gifts from donors. The £500 you refer to comes within the second element of this equation.

Basically the first £500 of each gift/ inheritance from each separate donor in any given year is not liable for tax. Thus, in your case, the child can receive £500 a year from parents, grandparents and others without incurring a liability under capital acquisitions tax, the tax covering gifts and the major one in relation to inheritances.

However, apart from this there are exemption limits - amounts which each person is entitled to receive by way of gifts and inheritances free of tax. The precise amounts depend on the relationship of the donor and the recipient.

In the case of gifts/inheritances from either parent, the child is entitled to receive up to £188,400 free of tax. Gifts/inheritances from grandparents, brothers and sisters, and nieces and nephews are tax-free up to around £25,000. Gifts and inheritances from any other source are free of tax up to around £12,500.

The one thing to remember is that such exemption limits are cumulative. Any gift or inheritance received after June 1st, 1982 is taken into account when assessing the liability to tax.

For instance, if your child received £5,000 by way of gift or inheritance from a cousin, distant relative or non-relative, the first £500 would be discounted as the recipient is entitled to such an amount free of tax each year from any given donor; the balance of £4,500 would be taxfree as it comes within the threshold. If, subsequently, the child received a bequest or gift of £23,000 from a grandparent, the first £500 is again discounted whether the gift/inheritance takes place in the same year or not. The balance of £22,500 then has the £4,500 from the previous gift/inheritance added to it. However, the tax-free threshold on gifts and inheritances from grandparents is higher than from distant or nonrelatives, so that, of the balance of £27,000, only around £2,000 will be subject to capital acquisition tax. Had the gift or inheritance been from a parent, it would not have been liable for tax, given the higher threshold on such transactions.

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