Dominic Coyle answers your finance questions...

Renting rooms

I refer to the question on renting rooms dealt with last week. My query is whether the 7,500 threshold is per room or per residence? If three rooms were let in the same residence at 6,000 each per annum giving a total yearly income of €18,000 what would the position be?

Mr J.B., Dublin

The position would be that the whole €18,000 would be liable for income tax minus the standard deductions for items directly related to the renting of the rooms, such as advertising, letting costs and the cost of furnishings, which could be written off over a period of years.

The rent-a-room allowance is very specific. If any income related to the renting of a room or rooms in your main home - your principal private residence - comes to €7,500 or less, no income tax is due on the money. If it comes to one euro more, the whole lot is liable for tax.

It doesn't matter whether you are renting one room or every bedroom in the place apart from your own. The only delimiters are that it is your main residence and the total income earned is less than or equal to the limit.

The €7,500 limit covers any income earned in relation to the room. You cannot charge rent up to that level and then charge for electricity, phone, laundry, food etc on top of it. The Revenue will simply tot up anything you earn from the person/people to whom you are renting and, if it exceeds €7,500, will tax you on the lot.

Under the rules of the scheme, you are required to notify the Revenue of the amount earned under the rent-a-room scheme in your annual tax return, even though no tax is due on the amount.

It also does not matter if the house is owned by more than one person. The €7,500 relates to the amount earned from the people who are renting and is not an individual limit for the person renting out the room in the property.

With-profit bond

I took out a with-profits bond with Norwich Union in early 1999 for five years. When I contacted Hibernian (which took over Norwich Union in the interim) early this year they informed me that an MVA (market value adjustment) had been placed on the bond.

This effectively meant that, if I cashed in the bond, I would lose the 1,500 that the bond had gained in the five-year term. I contacted Hibernian again recently and this remains the case. I could do with the money to finance another scheme that I have in mind, but I don't want to loose what the bond gained. What are my options?

Mr N.B., Galway

The thing that threw me with your query was the idea that an MVA would be applied to a product that had matured. After all, the whole point of MVAs is to protect all customers against adverse investment movements as a result of early encashment. If the bond had matured, early encashment does not come into it and that makes the imposition of an MVA confusing.

Having checked with Hibernian about this five-year Norwich Union bond, I am assured that no such product was sold by the company - either as Hibernian or as Norwich Union - in 1999. You will need to check again - either looking at your policy document or by contacting Hibernian with your policy number - to determine exactly what bond you have and when it matures. In all likelihood, you hold a 10-year or an open-ended bond, which is subject to MVAs at least up to the 10th anniversary.

Assuming that is the case, you do not have a lot of options. You can take your money out, paying the adjustment, and put it down to experience or you can hold out in the hope that things get better.

But bear in mind, they could also get worse. MVAs are the insurer's way of making you pay because they got their bet on the market wrong. The trouble is that there is nothing in the contracts you signed when you first invested in the bond to stop them introducing what are, in effect, penalty clauses. Worse still, there is nothing to stop them making them more punitive with the passage of time if markets continue to move against them - although there is the possibility that they would be done away with if rising investment performance replenishes the pot once again.

The reason MVAs were introduced was to stop people looking to encash their policies. Doing so would trigger a run on the company and leave it in a parlous state, along with those investors not sharp enough to liquidate their assets early enough.

Of course, if you take your money now, you state in your letter that you will be losing all of the gains made in the past five years. That seems harsh and is not a profitable transaction from your point of view given the rate of inflation in the interim.

I suggest you get advice from a professional and independent financial adviser. A fee-based one would be the best option but, unlike the UK, there is no way of sourcing one, except by chance. In any case, any authorised adviser should be well-versed in the outlook for this type of with-profits product.

SSIAs

I have an SSIA with Irish Life to which I have been contributing for more than two years. As a self-employed person, I am now in a position where I cannot afford to continue paying into the policy. I have been told I cannot stop the payments without risking a large tax bill. Is this true and, if so, what can I do?

Mr T.D., Dublin

In general, there is no problem in stopping payments into Special Savings Incentive Accounts after the first full year - which has passed for all SSIA holders. There is also no tax liability unless you withdraw the money you have saved together with any investment return and the Government contribution.

Where a tax liability comes in is if you withdraw your savings early. At that point, you face a charge of 23 per cent on everything in the account - the Government bonus, the investment return and the initial payments on which you already paid tax.

After two years, that would leave little gain for you.

However, if economic necessity means you have to stop paying into the account but can afford to leave there what you have already saved until the end of the five-year term, then you will pay only 23 per cent on the investment return at that time.

While it is easy with deposit accounts to stop and start payments, it is a little more complicated with equity-based investments, such as the one you bought from Irish Life.

As far as I can see, you will have some discretion in reducing your monthly payments to a minimum of about €100 a month - leaving open the possibility of increasing them later if you can afford to.

You can also stop payments although you will not be able to restart them as far as I can see. Still, as long as you leave your existing savings there, no punitive tax bill will apply although charges on the account will accumulate, eating into your investment.

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.