Q&A

Dominic Coyle answers your finance questions...

Renting rooms

Our daughter and her husband have just managed to buy their first house, which is quite near a third-level education centre. They would like to let one or two rooms to help with the mortgage.

The idea of students appeals to them as they would have vacations free. Does the same threshold of €7,500 apply there? Ms W.B., Dublin

It does. The situation you are describing comes under the terms of the rent-a-room allowance, a measure introduced by the Minister for Finance, Mr McCreevy, in April 2001 specifically to help people struggling under the burden of hefty mortgage payments on a new home in the early years.

The number of rooms let does not matter as long as it is the principle private residence - i.e. your daughter's main home. Similarly, it does not matter whether the tenants are students or anyone else.

The most important element is the threshold. You can only earn €7,500 free of income tax under the scheme. If you go a euro over this amount, you are liable to income tax on the whole amount, which will be treated as standard rental income.

Another thing to note is that the €7,500 limit includes any money your daughter receives from tenants for food, laundry or other similar items.

Equally, the fact that there are two people claiming - your daughter and her husband - does not alter the limit. The maximum allowed is divided between anyone entitled to a share of the rent.

Renting rooms in this way does not affect entitlement to mortgage interest relief. More importantly, it will not leave your daughter liable to capital gains tax when she eventually sells the property. However, if they exceed the €7,500 limit, this could affect such exposure.

Finally, they will have to include the income on the annual tax return even though it is not liable to tax, nor to PRSI and the health levy.

Capital gains tax

I have a holiday home, not rented out. If I moved to the holiday home, say on retirement, and rented out what is currently my main residence, at what stage would I become liable for CGT if I subsequently sold this former main house? Could I move back in for a short period before selling to avoid CGT? Mr P.D., email

Pretty much immediately. Basically, you are only allowed to have one principle private residence. Anything else is seen by the tax authorities as an investment and liable to capital gains. Whether you rent it out or not is immaterial for CGT purposes, although it is important in terms of income tax on rental income.

Moving back into the house before you sell will, of course, reduce the CGT liability but then the liability will switch to the holiday home for that period.

The one break is that the 12 months before you sell will be discounted for capital gains tax purposes.

When working out capital gains, the tax authorities will be interested in the proportion of your ownership of the property during which it was not your principle private residence. So, if you lived there for 34 years and then moved out to the holiday home, and sold the first house six years later, the Revenue would levy CGT on 5/40ths of the gain on the property between its purchase and its sale.

Before working this out, you would need to multiply the original purchase price by the relevant Revenue indexation multiple (something which was abolished at the end of 2002 but applies to all periods up to then) and also allow for the costs incurred in buying and selling the property.

You would also allow for your annual capital gains tax allowance of €1,270 before totting up the bill.

UK pension

My uncle was born in the "26 counties" in 1920. He spent most of his working life in the UK. He returned to this country in 1986. In 1986, he contacted the Irish Tax Office. He claimed (and was granted) an exemption on his UK Civil Service Pension under Article 18(2) of Double Taxation Convention. He was taxable on all other income (including all other UK pensions) in this country. He continued filing his tax return on this basis to date.

Only recently he became aware that there was a change in the 1999/00 tax year onward with regard to UK Civil Service Pensions. It is now taxable only in Ireland if the recipient is a resident and national of Ireland.

He is clearly a resident of the Republic, but is he a national? His Irish passport was "forwarded to the Irish Embassy in London" in 1972 when he notified the Home Secretary of his "claim to remain a British subject under section 2 of the British Nationality Act 1948".

I tried to contact the Residency Section of the Revenue Commissioners in Nenagh on his behalf, only to find that this section has been disbanded.

Upon examining his papers, he does not appear to have paid any UK tax on his UK Civil Service Pension from 1999/2000 onwards. He thought that his UK allowances covered it.

On the face of it, he could owe the Revenue Commissions a sizeable sum of money. Although it is not a large pension, if he has to pay tax on it at his marginal tax rate backdated to 1999/00, the overall liability would be quite high. He is totally bewildered as how this could have happened, as he is a keen reader of the financial press and reads carefully all his tax correspondence, although he may have missed something due to his age.

What should he do now, as he is very concerned about the situation? Ms K.D., Donegal

It would seem as though your uncle has become an unwitting victim of the change in the rules in 1999.

That said, it does sound as though he has a liability to the Irish tax authorities. Mr Jim Kelly, tax partner at Grant Thornton, suggests that he get in touch as soon as possible with the Revenue. In the circumstances, he says it is highly likely that the Revenue will take a lenient approach - i.e. will levy no penalties on the tax owed. However, he will still have to pay the tax, and possibly interest.

Under the old provisions - the ones that applied in 1986 when your uncle returned to Ireland and confirmed his status with the Revenue - only people who were nationals here and not nationals in the UK had to pay tax to the Irish authorities. Everyone else, such as your uncle who had dual nationality by virtue of when he was born and reaffirmed it in 1972, was assessed for tax under the British code.

That system was changed in 1999, as you are aware. The move was in large part intended to bring the Irish and British systems in line with OECD norms apparently. On this explanation, your uncle's situation is simply an unintended consequence.

Notwithstanding the fact that his passport was sent to the Irish Embassy in London in 1972, your uncle would still appear to be an Irish "national" by virtue of his birth. And, as you say, he is clearly a resident here.

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.