Q&A

I purchased a four-bedroom house two years ago. As I was a first-time buyer of a new house I incurred no stamp duty on the purchase.

Stamp duty

I now no longer need a four-bedroom house and am considering two different options, both of which, as I understand it, would lead to a stamp duty clawback on my original purchase as I have not held it as a principal private residence for five years:

a) Hold the four-bedroom house as an investment (rent it out in its entirety) and purchase a one- bedroom apartment for myself;

b) Hold the four-bedroom house as an investment (rent it out in its entirety) and rent my friend's one- bed apartment while he is abroad for the next two years or so.

Is there any way to avoid paying stamp duty and change my current principal private residence into an investment property?

Mr R.M., email

Either way, as I see it, you are going to fall into the stamp duty trap. As you say, when you first bought the house, you were entitled to an exemption from stamp duty as a first-time buyer. This dispensation has been allowed by the Government despite its trend to limiting reliefs from tax. It is an acknowledgement of the difficulty first-time buyers face in getting a foot on the housing ladder and a valuable one at that.

It is geared, however, specifically and logically given the reasons for its existence, to first-time buyers who are also owner-occupiers and, as you are aware, there are arrangements to claw back some or all of the stamp duty exemption granted in cases where the first-time buyer is no longer an owner-occupier, never mind those who actually sell on the property.

So the simple if unpalatable truth is that there is no way to change your principal private residence into an investment property and avoid the requirement for paying stamp duty on this property.

There may be a third option: you could rent out a room in the property. It may or may not fit the bill but would certainly avoid the requirement to pay back any stamp duty on the house.

An owner-occupier is permitted to make € 7,618 per annum from renting a room free of tax without losing their vital owner-occupier status.

If it does not fit the bill, your choice seems to come down to renting or buying a one-bedroom apartment and letting out your own property.

Pension

Mr D.L. wrote last week about his concern that he was being forced to abandon a perfectly good personal pension because he had started work with an employer who offered access to an occupational scheme. Having contributed the maximum to his personal scheme, he was reluctant to give it up but his employer insisted he contribute to the occupational scheme. He wanted to know what his options were, especially as this is not a permanent job and he may have to revert to providing his own pension cover.

Having checked with various authorities, including the Pensions Board, I replied that he could contribute to only one pension. I suggested he check with the personal pension provider to see if he could freeze that policy or investigate whether the employer would countenance a PRSA alternative, especially as he might only be with the employer for a couple of years.

However, no less an authority than Pensions' Ombudsman Mr Paul Kenny has been in touch to point out a little known initiative announced by the Minister for Finance, Mr McCreevy, in his last Budget. It allows you to continue paying into your personal pension even while contributing to an occupational scheme. You will not be eligible, however, for tax relief on the contributions to the personal scheme while other pension contributions are being made.

The purpose of the clause, I gather, was to take account of the more mobile workforce. An increasing number of people were taking out personal pension plans, in which commissions and charges were front-loaded (disproportionately paid in the early years of the scheme). People who found themselves in an occupational scheme a few years later could find that, once commissions and charges were taken, they had practically nothing left of their contributions to a plan they were being forced to freeze or close.

As the Government is looking to encourage personal pension provision this was seen as counterproductive, hence the new option.

First Active

Last week, you told Ms H.McK. that the capital reduction scheme at First Active occurred when the company allocated two bonus shares for each existing share - free or bought - and then cancelled those bonus shares.

On the basis of "first in, first out", the policy generally adopted by the Revenue in relation to share disposals, would the capital reduction programme not see the disposal of all the free shares, and their attached bonus shares, before touching bought shares that were acquired at a later date and their attached bonus shares?

Mr B. McC, Wicklow

Good point. You are quite correct. I am afraid I was relying on information provided to me by people speaking on behalf of First Active, who indicated that the bonus shares were the shares disposed of in the capital reduction exercise. In fact, as you point out, the "first in, first out" rule does apply.

For people like Ms H.McK., who had free shares and other shares that she bought later, the two bonus shares per share are deemed to be acquired on the same day as the original holding. In other words, the 1,980 bonus shares on her 990 free shares will be considered to have been acquired on the day of flotation. The 2,000 bonus shares granted for the 1,000 bought shares will date back to the acquisition date for those shares.

The company still cancelled 3,980 shares - a number equivalent to the total free shares issued in her case. However, they did this starting with the earliest shares acquired. So, the original 990 free shares and 1,980 attached bonus shares go first. That amounts to 2,970. The balance of 1,010 are taken from the bought shares acquired later and attached bonus shares.

The acquisition cost of the 1,000 shares is spread across both those shares and the attached bonus shares. So, if Ms H.McK. paid 3 per share at the outset, her outlay would be 3,000. Spreading this across the 3,000 shares she now holds in respect of that purchase, the cost per share is consequently 1.

As a result, getting rid of the balance of 1,010 shares from this tranche will see the "acquisition cost" of 1,010 offset against the total capital gain from the exercise. At 56 cents per cancelled share, or 1.12 per share of your total shareholding before the capital reduction, the gain would be €2,228.80 (3,980 x €0.56). Taking the "cost" of the shares involved, you deduct 1,010, leaving a gain of 1,218.80 in this example, below the capital gains tax threshold.

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.