I have a cheap loan of £40,000 at 3 per cent interest which was borrowed to purchase a house three years ago. I have since been transferred and have retained the house for letting. The Revenue charges me Benefit in Kind at 11 per cent because I am not living in the house. This is well above the normal mortgage rate. In addition, it only allows me interest actually paid at 3 per cent against rental income received on the house. Can this be right?
Mr J.O'B., email
The loan you refer to is a preferential loan and, as such, is treated by the Revenue Commissioners as Benefit in Kind (BIK). While not as common a BIK as a company car, it is certainly a major issue for people working where they have access to cheap loans.
Whether or not you live in the house does not affect its BIK status but it does influence the "specified" interest rate, the Revenue applies to the loan for tax purposes. The "specified" rate for loans used to purchase, repair or improve your main residence is 7 per cent and this would have applied to you until your transfer. Subsequently, your case attracts a "specified" rate of 11 per cent as do all loans for purposes other than the particular circumstances outlined above.
The Revenue says the "specified" rate is calculated by the Department of Finance by reference to commercial rates. Prior to the setting of the Budget in any given year, the Department looks at equivalent loan rates in financial institutions around the State. While the 11 per cent figure seems high relative to mortgage rates, that could be because the rate is not compared with rates for mortgages, but with those for ordinary car or home improvement loans on the basis that the house is not the primary residence. The 7 per cent rate, applicable to primary residences, is much closer to mortgage rates at the time. The good news for Mr J.O'B. is that the rates for BIK on his loan should fall fairly dramatically next year as interest rates are forced down to the levels pertaining in the new euro currency bloc.
In relation to the second point you raise, I agree it seems totally unfair that the authorities should effectively charge you a rate of interest of 11 per while only allowing you 3 per cent against your rental income by way of an allowable cost. In the normal course of events, interest payable on money borrowed to purchase, improve or repair the property can be offset against the rents received.
Unfortunately, the Revenue confirms that in cases of properties to which BIK provisions are applicable, only the actual interest paid is allowable.
Don't forget that while the benefit is assessed for tax, it also qualifies for mortgage interest relief subject to normal limits.
In this case, the £40,000 yields an annual interest bill of £1,200 at 3 per cent. However, the "specified" interest rate is 11 per cent, giving a BIK of £4,400. Against this one sets the actual interest paid (£1,200), leaving £3,200 which is treated as income for the purposes of tax but is also treated as "deemed interest paid" for the purposes of mortgage interest relief. Mortgage interest then applies to the whole of the interest bill - actual and "deemed". At the current rate of 80 per cent, minus £200, that gives mortgage interest relief of £3,320 which will be granted at the standard income tax rate of 24 per cent.
If one holds units in an Irish equity unit-linked fund and the ISEQ goes up by 20 per cent, one could expect the value of the units to increase by about 15 per cent, allowing for taxes due.
If, in the following period, the ISEQ goes down by a similar amount, can the tax paid on the way up be claimed back on the way down?
Mr G.O'S., Dublin
The tax charge on such funds is calculated on an annual basis and therefore fluctuations within that period would not materially affect the tax charge on the funds or its units.
The simple answer is that losses in a particular fund can be offset within the fund but not outside of it. As such, you should reap the full tax advantages within the fund but you cannot claim relief against tax paid outside of the fund.
I wonder if you can give me some advice. I will shortly be getting £10,000 and am wondering what is the best way to invest such a sum of money, particularly in the light of inflation and EMU?
Ms J.A., email
This is just one of a whole series of letters received by this column seeking advice on financial investments of a specific nature.
The answer is simple. Central Bank rules governing the dispensation of financial advice preclude this column from giving such specific advice. In any case, it is not in a position of expertise to do so.
What it can do is answer specific questions relating to particular products or tax issues which have arisen or will do so in the future. In addition, the new Moneymaker feature starting today on this page will be of assistance to those seeking general information on investments.
Send your queries to Q&A, Business This Week, 10-15 D'Olier St, Dublin 2, or email to dcoyle@irish-times.ie.
