Q & A

DIRT Tax

I have some of my retirement lump sum in a SSA account. My question relates to the DIRT tax, which I am paying on the interest on this money. I am 67 years of age and I have been told recently that I should not have to pay DIRT since I reached the age of 65. Is this the situation? If so, how do I go about reclaiming the DIRT that I have already paid? There is one slight complication. The account is held in the joint names of my wife and myself. My wife is not yet 65. How does this affect any reclamation of DIRT? Mr F.R., email

The first thing to note is that the rate of Deposit Interest Retention Tax (DIRT) is lower on Special Savings Accounts (SSAs) than on other bank savings. However, given that the tax is levied generally at the standard rate of income tax and this has now fallen to 24 per cent, the dispensation on such SSAs where DIRT is levied at 20 per cent is not as beneficial as it once was.

Having said that, you are quite right in your information that people over the age of 65 are not liable to DIRT - if their income falls below that which qualifies for income tax. As a matter of interest the same is true for people who are permanently incapacitated. Those investors, whose income is only marginally higher than the income exemption limit may qualify for partial refunds.

The income exemption figure tends to rise each year in the budget. At the moment the threshold below which no single or widowed person over 65 pays tax is £5,000 (€6,349). That figure doubles to £10,000 for a married couple. The income exemption limits for people below retirement age do not change next year, but they do rise for pensioners as part of the Government's efforts to improve the financial position of the elderly. For the tax year 1999/2000, therefore, the relevant thresholds will be £6,500 (single/widowed) and £13,000 (married).

Of course, in your case, you will need to refer back to the thresholds for the last two years since you turned 65 in order to check whether you are liable for DIRT in either of those years. The over-65 thresholds for 1996/97 were £4,500 (single/widowed) and £9,000 (married) and for 1997/98, they were £5,200 (single/widowed) and £10,400 (married).

You say you are a retired teacher and it may be that your income in retirement might exceed those limits, but still leave you eligible for marginal relief. This occurs where your income is greater than the exemption limit but is less than twice that limit. In such cases, tax is payable on only 40 per cent of the income above the exemption limit. Say for instance, that your family income this tax year (1998/99) is £20,000. Your income tax liability would be 24 per cent on 40 per cent (£20,000 minus £10,000). Working it out, you are liable to tax on 40 per cent of £10,000, which is £4,000 at a rate of 24 per cent which equals £960, substantially lower than the £2,400 it might otherwise be. Similarly, you would be entitled to a rebate on DIRT.

The fact that the SSA is in joint names of yourself and your wife, who is not yet 65, is of no consequence as the exemption is determined by the older person in such cases.

With regard to claiming back any money you may be owed, you need to get a form 54d or 54e from the inspector of taxes after the end of the relevant tax year. There are limits as to how far back you can go in claiming tax overpaid but you would be well within those limits. With any submission, you would need to include a certificate of interest paid and, if relevant, a P60.

Property

I would like to get some precise information in relation to property purchase. If I buy an apartment and let it out, I get £500 (€635) per month out of it while my mortgage is £700 per month. How much do I need to pay in tax? Mr A.M.K., email

While I am fully aware you are looking for precise information, you do not give me enough information to narrow down what you may or may not be entitled to. Basically, it depends on whether this is your primary residence, whether you are a first-time buyer, whether the property is in a designated area where you can claim certain section 23/27 reliefs or, indeed, whether it is in a resort area where certain tax incentives are available.

Taking the simplest scenario first, the basic rule is that rental income is liable to income tax in the same way as other earnings. This is done on the basis of same year earnings. That is to say the rents you receive up to April 5th this year are treated as income in this tax year for the purposes of income tax.

There are certain items, which can be offset against your rental income before assessing your tax liability. These include, any ground rents or rates payable by you, insurance on the flat, costs involved in letting the premises, repairs and maintenance and any management or sundry charges incurred by you in relation to the flat - such as cleaning and the provision of services like heat, light and telephone. This would also include a capital allowance of 15 per cent in the first six years on the value of fixtures and fittings installed at your expense in the premises with the balance of 10 per cent being allowed in year seven.

The precise amounts of such allowances will obviously vary from premises to premises but it is important that you keep any relevant receipts as they may well be sought for examination by the inspector of taxes.

There is one area where the law has changed quite dramatically in the last year - interest on money borrowed to purchase or repair such properties. This used to be allowable against rents received. Following the Bacon report, no such allowance is given unless the property was bought prior to the end of last year under a contract which existed prior to April 23rd of last year. In the last budget, the Minister for Finance extended the end-year deadline to April 1st, 1999. If you rent your primary residence after the April 23rd, 1998, deadline, interest on your existing mortgage may not be allowable. There are certain breaks in this provision in relation to investments in certain designated areas.

Although not the case you outline, should you incur a loss in any given year on the property, after allowing for costs, this can be offset against rental profit in a later year.

The second main tax liability you would need to consider would be any liability to capital gains tax should you sell the property. This applies to investment property; should the property be your main residence, you will still be liable to capital gains tax for that period for which it is rented. CGT is charged at 20 per cent on the calculated investment gain after allowances for costs involved in its purchase and disposal and an indexation element to allow for inflation. There is also a £1,000 allowance on gains per annum which is free from CGT.

Additional reliefs will be available if the property is in a designated area but, as you can see, without far more detailed information, it would be impossible to say precisely how much you will need to pay in tax. I would certainly advise you to seek professional advice with regard to tax liability in this instance.

Please send your queries to; Dominic Coyle; Q&A, The Irish Times, Fleet St, Dublin 2 or email to dcoyle@irish-times.ie.