Dominic Coyleanswers your questions.

Calculating tax rate on SSIA investments

I am sure that by now you are sick to death of SSIA questions, but mine might be a little different. An SSIA in my wife's name recently matured and she is thinking of availing of the Pensions Incentive Credit Scheme by investing €7,500.

An SSIA account in my own name matured last year and was not invested in the aforementioned incentive scheme. My wife's only income is social welfare, which is combined with mine for income tax purposes.

I am finding it difficult to get clear information from pension companies (I've tried two) with regard to the following. With regard to tax charges on the sum invested at the end of say 13 months, what tax rate would apply in her case since our combined income attracts the higher marginal rate?

Perhaps you could do out a worked example taking €7,500 invested, €2,500 added and then all withdrawn after say 13 months. I should add that we are both over 60 and under 70.

Mr J.O'M, e-mail

As you say, it is very difficult to get anyone to state categorically what the position is in any individual case without them having access to your full details. I can see your conundrum - your Special Savings Incentive Accounts (SSIA) were individual investments by each of you. However, in general, you are assessed as a married couple for income tax purposes.

The general view is that any income arising from a pension drawdown - which is, ultimately, what your wife's Personal Retirement Savings Account (PRSA) would be - would be treated in the same way as other income. There is no reason the people to whom I have spoken can see why it should be treated differently.

Thus, if you already subject to tax at the higher level, it is pretty likely that the PRSA drawdown would be liable to income tax at the higher rate. That would negate the advantage of the €1 for €3 bonus available to you under the Pension Incentive Credit Scheme.

Effectively, you would get a bonus of 33 per cent on your initial investment of €7,500 - €2,500 - for a total investment of €10,000. Charges on the PRSA would amount to roughly 6 per cent over the course of the 13 months you propose - or about €600 on the entire fund of €10,000.

Upon maturity - say in 13 months - your wife would be entitled to take 25 per cent of the fund free of tax, say €2,350 of the €9,400 left of your fund after charges. On the balance of €7,050, you would face tax at 41 per cent - or €2,890.50, which on top of the charges incurred (circa €600) - brings the cost of your wife's investment to €3,490.50.

Accepting that this example makes no allowance for investment gain - not likely to amount to much over such a short period in the cautious sort of fund a standard PRSA would be invested - you would be facing an outlay of close to €3,500, which would more than offset the benefit of the Government bonus in the first place.

PRSA drawdown

Is a person aged 69 years investing €7,500 of matured SSIA savings in this pension scheme allowed to draw down the deposit plus €2,500 bonus before reaching the age of 75?

Ms V.S, e-mail

The rules on the drawdown of funds from a pension scheme such as a Personal Retirement Savings Account (PRSA) are fairly straightforward - at least by the standard of financial services - and are tied to your level of income.

Essentially, you can, in any case, drawdown one-quarter of your PRSA fund free of tax any time after the age of 60 and up to the age of 75.

Thereafter, your freedom to draw down your funds depends on whether you have guaranteed pension or annuity income from any source of at least €12,700 a year for life.

If not, a sum of €63,500 - or the balance of the PRSA fund if less than this - must be transferred to what is called an Approved Minimum Retirement Fund (AMRF) or used immediately to buy an annuity.

Buying an annuity at current low rates would not be an attractive option, unless there were no alternatives.

Leaving it in an AMRF is also restrictive. Funds in an AMRF cannot be withdrawn until the AMRF holder reaches the age of 75 - although interest or investment gains on the fund can be accessed.

Of course, if you have a guaranteed annual income of €12,700, the issue does not arise and you will be allowed to draw down the PRSA in its entirety - with three-quarters of that fund being liable to tax at the relevant rate, depending on your income in the year of drawdown.

Residence query

Last September, myself and my family purchased a new principal private residence and moved into it a few weeks later. We are still trying to sell our previous home and I understand we have one year's grace to sell the property before any gains become taxable.

Does the one year grace start from when we purchased our new home or when we moved out of our old home?

Is it enough to sign contracts within the year or does the sale need to be closed within the year? (In answer to a recent question regarding the timing of liability of capital gains tax on disposal of a property, you said that any gain became taxable on signing of contracts and not when the sale was closed).

If we missed the one-year deadline by, say, one month, is the proportion of the gain taxable based on just one month or is it one year and one month?

We have not rented out the house since we moved out.

It seems a little unfair that the property has dropped in value since we moved out, but we could end up having a sizeable tax bill for gains that occurred while the property was our principal private residence. (I understand any gain is just proportioned between the time it was our principal private residence and the time it wasn't.) Any help on the above questions is much appreciated and may (or may not) help my wife sleep better!

Mr E.B., Dublin

My understanding is that the clock starts ticking when you buy your new home. Effectively, you cannot have two principal private residences. Naturally, there is always a gap between one property being bought and the existing home sold; that's why the grace period exists.

Again, and you would want to take professional advice on this, my advice is that signing of contracts would be sufficient within the year. However, I know this is a grey area and the cost of being wrong could be significant. You really should get professional advice - at least then there would be some class of indemnity against what could prove a costly error.

The rules on investment properties hold that the last year of ownership is always considered to be owner occupation, even if that is not physically the case. To my mind, that would indicate that you would be liable to tax only on the period over the year's grace.

The fact that the house has not been rented will not affect the situation on capital gains tax. You can only own one principal private residence and any other residence is liable to capital gain tax on disposal - after taking the year's grace into account.

Unfair as it may seem, it would be very cumbersome to get precise valuations at the time people moved out of properties to assess tax. Thus, the only clean way is to take the purchase and sale prices - minus costs incurred and allowing for indexation up to the end of 2001 (when this provision was dropped) - and apply capital gains tax at 20 per cent.

You are right that the tax would be levied only on that portion of ownership that the house was not your principal private residence - likely to be very small in a case such as this.