Q&A

Dominic Coyle answers your finance questions

House sale

I am currently in the process of selling a house, which was my principal private residence up to last October. At that time, I purchased another house, which is now my principal private residence, and rented out the other. I am due to sell the first house soon, and the individuals renting it have moved out. As there will be a substantial profit made on the sale, are there any capital gains tax implications? Mr K.N., Dublin

As long as you sell the house before October, you will not face any capital gains liability on the sale of the property. A person's principal private residence - their home in other words - is exempt from capital gains.

When it ceases to be the main residence, capital gains becomes an issue regardless of whether the property is rented out or not.

However, one of the other features of the capital gains tax code as it applies to residential property is that the 12 months prior to the sale of a property is discounted when it comes to assessing capital gains. Effectively, the owner is deemed to be using the property as a principal private residence during the last year of ownership even if it is rented out during that period.

On that basis, you are safe from the capital gains tax net as long as you sell the property before October this year.

You will, of course, still need to declare any rental income received from letting out the property when you file your income tax return. The fact that you do not have a capital gains liability does not in any way affect your liability to income tax on rental monies received - allowing for the costs incurred in renting the property, of course.

Second home

I am a single person working in Dublin on a gross salary of €55,000 per annum. I have paid off the mortgage on my own new flat and have no other income or property. My elderly parents are retired and live in the country. Likewise, they have no mortgage or income apart from their non-taxable pensions. I would like to buy an extra flat in Dublin where they (my parents) could visit regularly on weekends or perhaps longer. The flat would have one or two bedrooms and cost around 400,000. They have offered to pay 20 per cent to 25 per cent downpayment. The flat will be in my name. I will pay the mortgage and will not draw any income from it. The flat is new and is currently being built.

This downpayment offer is their total savings and presently earns 2 per cent per annum with DIRT taken out by the bank.

1. Would there be future inheritance tax implications related to their downpayment offer?

2. Are there any tax deductions to me against my single PAYE salary, especially if I have to pay stamp duty?

3. If the flat is new and just built, will I be exempt from stamp duty?

4. Are there any extra taxes, stamp duty or other implications if the flat is second-hand and needs refurbishing? Ms C.H., Dublin

There are several tax issues involved in the transaction you propose. Taking them in the sequence you set out, the first is inheritance tax or capital acquisitions tax as it is more formally known. The downpayment offer from your parents could have both current and future implications for you.

In Revenue terms, the payment will be seen as a gift and there are limits on how much you can receive by way of gifts and/or inheritances before triggering a liability to capital acquisitions tax (CAT).

In the case of gifts from a parent to a child, you can receive €456,438 from your parents before being liable to CAT. This should cover any downpayment your parents would make on the property unless you have previously received a gift from them.

However, the gift would be taken into account in assessing any subsequent CAT liability arising from an inheritance from your parents.

The only relief you are likely to get against your income, assuming you are not buying an apartment that qualifies for special relief under a renewal scheme, is mortgage interest relief.

On the issue of stamp duty, you are going to be liable for the cost of the apartment. There is an exemption on stamp duty in relation to newly built property but it only applies to owner-occupiers and you will not meet those criteria.

The fact that the apartment might be second-hand or in need of refurbishment would not materially affect your situation, again assuming that it is not in a area where it can avail of special tax exemptions under various short-term renewal schemes.

With-profit bond

We have received several emails on the subject of the Hibernian with-profits bond that Mr N.B. from Galway inquired about last week.

He thought the bond in which he invested in 1999 matured after five years and was distressed to discover that he was facing a market value adjustment that would wipe out any gains on the investment if he cashed it in now.

It emerged that Hibernian (and its predecessor Norwich Union from whom Mr N.B. bought the bond) never sold a five-year bond in 1999 and the company's best guess was that he had invested in one of the Celebration bond series, an open-ended investment.

One broker familiar with the Norwich Union product range back in 1999 writes that brokers were advising their clients that they could exit the bond without facing a surrender penalty after five years. This is entirely correct. Surrender penalties are different than market value adjustments (MVA).

What this meant, says Mr Colm McLoughlin of McLoughlin & Staunton in Loughrea, is that many investors took a five-year view of the investment and its guaranteed year one bonus of 10 per cent.

Although there was no MVA in force at the time, the contracts stipulated that, should one be imposed, there would be a 14-day window of opportunity either side of the 10th anniversary of the product purchase.

From Mr N.B.'s point of view, that leaves you holding on for five more years to access his funds without sacrificing his investment gain.

The alternative, suggested by Mr Karl Daly, an authorised adviser based in Limerick, is that you could try to sell the policy on the second-hand endowment market.

While you will not get the full amount of the policy, you would get more than if you simply cashed it in now. The purchaser will pay that premium because they can afford to hold on for the 10-year window in which they can cash the policy in without getting hit by the MVA.

As Mr N.B. was looking to access the funds to invest elsewhere, this might prove an attractive option.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, D'Olier Street, Dublin 2 or e-mail to dcoyle@irish-times.ie. This column is a reader service and is not intended to replace professional advice. Due to the volume of mail, there may be a delay in answering queries. All suitable queries will be answered through the columns of the newspaper. No personal correspondence will be entered into.