Dominic Coyle answers readers' queries on various financial issues

Scots Provident

My wife and I will jointly receive about €7,500 (£5,900) from the Scottish Provident demutualisation.

We intend to take the loan bond option rather than the cash option. A small amount of interest will be paid on the loan bond until it is fully redeemed. We plan to redeem the bond over the three years from 2002 to 2004, each year cashing in an amount slightly less than €2,540 (the sum of our individual capital gains tax allowances of €1,270).

Assuming that capital gains rules are not changed and that we make no further capital gains, will any tax liability arise? If there is no tax liability, must we nevertheless declare the capital gain on our tax returns?

Mr D.O'N., e-mail

No, there will be no further tax liability. Your proposal illustrates the purpose of the loan bond - to help members of the now demutualised Scottish Provident avoid capital gains tax. Planning of this sort is especially useful in the Republic, where the capital gains tax-free threshold is much lower than in Britain. As I said last week, the loan notes can be redeemed at any time over 10 years and six-monthly intervals. However, you will need to declare the windfall gain on your tax return, as you need to declare all income, even that on which any tax due has been paid.

SSIAs

I am at present preparing my income tax return for the period ending December 31st, 2001. I opened an SSIA with the credit union in this period. Do I have to return any interest/dividend certificate in respect of this account on my tax return?

Mr J.D., e-mail

No. The Special Savings Incentive Scheme is a five-year savings plan and, as such, you have not yet received any income from this investment. When the account matures, any interest or dividend will be taxed automatically by the plan-provider at the standard rate at the time plus 3 per cent (currently a total of 23 per cent). The one exception to this is if you close your account early but again you would be taxed at that point by the plan-provider.

Your return only relates to income received and that is not the case at this point with your SSIA, although the Government bonus and any interest/dividend have been credited to the account. Mind you, it is refreshing to see someone organising their tax affairs just days into the new year.

How secure are savings (re the special savings incentive account scheme) in the event that the financial institution with which you have invested gets into financial difficulties?

Mr J.K., Clare

Your savings under the special savings incentive scheme are as safe as any other money you hold in, or invest with, a financial institution. All financial institutions offering SSIAs must be licensed by the Central Bank and meet the obligations it imposes to ensure the issue of collapse does not arise. The fact that the Government makes a contribution to the savings of individuals under the scheme has no bearing on the security of the savings. The Government made clear at the outset that it was not going to become a scheme provider itself, although State banks and An Post were allowed to offer accounts.

Refunds

I am a pensioner in receipt of a partial contributory old age pension. I have some savings and am investing in the Government's special savings incentive scheme. Someone told me that I should be able to claim back tax deducted on my savings and on certain share dividends I receive. I cannot find out if this is so, however, and if it is, how do I go about it?

Ms A.C., e-mail

There are different regimes in place for taxing various forms of investment - in your case stocks and shares, bank deposits and the Government special savings incentive scheme.

Dividends on shares are subject to dividend withholding tax. This means that the dividend you receive has already been taxed by the company registrar on your behalf and the funds sent on to the Revenue. On Irish shares, this tax is levied at the standard rate, currently 20 per cent. However, people like yourself, whose income is not sufficiently high to be subject to income tax, are entitled to claim a refund of this money. You need to contact your local tax office and get a copy of a form to claim the refund.

On bank deposits, to which your letter also refers, tax is levied on interest by way of the deposit interest retention tax (DIRT). Again, you are entitled to an exemption from this because of your income level. Getting your money back will mean filling out another form, which should be available from your local tax office. This is called Form 54D.

The bad news is that you will have to get a form for each year for which you are claiming and you will also need to get certificates from each of the institutions with which you may have savings accounts upon which DIRT was levied.

Turning to the Government- sponsored special savings incentive scheme, you will be taxed at the standard rate plus 3 per cent (currently a total of 23 per cent) on the investment gains/interest on the account at the end of its five-year term. There will be no tax on the Government contribution unless you close your account early (there is an exception should the account be closed early because of your death). You would not be able to reclaim the tax on this scheme.

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.