Q&A

Dominic Coyle answers a selection of your finance queries

Rent-a-room relief
Some 35 years ago we converted the basement of our house into a self-contained flat - an area of 72 square metres. It has its own gas and electricity supply plus phone but the central heating is a single unit for the entire house.

Initially the flat was created for the use of my parents and, when they died, it was used by a succession of our children until they found their own homes. Now the flat is to become vacant.

Originally we had planned to reintegrate the flat into the house again but we are now in our mid-70s and we have three large empty bedrooms upstairs, sufficient for visits from friends and family.

So we were wondering if we could avail of the rent-a-room scheme and let it. We would expect the prospective tenant to pay for the utilities but otherwise we are not much concerned with the income.

Since we spend five or six months abroad, it would suit us to have someone in the house during our absence. But does such a flat qualify under the rent-a-room scheme? Mr C.McL., Dublin

I can see the sense of what you are trying to do here but I very much doubt that you are going to be able to avail of the rent-a-room allowance scheme. Accountants that I have consulted are strongly of the same view although no-one I spoke to could be categorical on it.

The nub of it is the issue of a "qualifying residence". Essentially, this is seen as your principal private residence - the home you habitually occupy. In this case, the fact that the flat is self-contained means it is almost certain to fall outside the Revenue's idea of a principal private residence.

Ironically, if you did decide to reintegrate it into the overall property, it would qualify - not that I would suggest going to the expense and hassle of carrying out this exercise just for the purposes of attracting this relief. But the fact that it needs reintegration in itself bolsters the view that renting it would not come within the terms of the rent-a-room relief scheme.

You could always rent the property out. It sounds as though its market rental income would substantially exceed the limit on rent-a-room relief and could be as financially advantageous to you as well as fulfilling your understandable interest in having someone on site while you are out of the country.

The issue isn't cut and dried though. For instance, if and when you sell the entire property, is the Revenue really likely to look upon the self-contained flat as an investment property when it was originally your basement and continues to form part of the overall building? You could certainly argue that it is part of the family home and that it has been used as such.

In the end, being Ireland, I imagine the Revenue will not agree to rent-a-room relief but will treat any ultimate sale as a single unit as a disposal of a principal private residence.

Of course, if you do rent out the basement for a market rent or if you try to sell it separately from the rest of the house, the issue is going to be clear-cut.

AVCs v mortgage
I am in my mid-thirties, in relatively stable employment, and currently contribute the maximum amount possible (in AVCs) to my company pension scheme. Having recently bought a house with rather a large mortgage, would I be better off to lower my AVCs and "over pay" on the mortgage in order to bring it down to a safer level? Mr N.R., Dublin

The general rule is that you should always pay off your debts before looking to savings. With pension savings, the situation is somewhat complicated by the fact that no-one wants to pass up on the very generous tax relief available on contributions, including Additional Voluntary Contributions (AVCs).

At the very least, I would suggest you should reduce your AVC contributions for the moment and bring the mortgage down to what is a more comfortable level for you. From your letter, it sounds as though you run the risk of leaving yourself exposed should you continue to maximise your AVCs and interest rates rise significantly.

It has to be said that there is no indication of a rapid change in interest rates. In fact, the best guess is that they will only begin to rise in the second half of the year. However, given their current low level, any increase is likely to have a disproportionate impact.

There is a solid argument that, even when the mortgage is at what you consider to be a "safer" level, you might consider continuing paying more than required on the mortgage.

You appear to have adopted a very responsible approach to providing for your eventual retirement income. There are very few people in their thirties maximising their AVCs.

However, you can never tell what the return is going to be on your AVC investments on a year-to-year basis, as the experience of the past five years shows. The average return over that period will fail significantly to offset what you would be paying in mortgage interest over the same period.

Sure, there is the tax relief but this will increase as you go along and I think you would be better advised to lower the mortgage in the short term - especially if you have the savings discipline to subsequently use the money to boost those AVCs.

Stamp duty clawback
As a first-time buyer, I received stamp duty relief when I bought my apartment a couple of years ago. At the time I had no intention of moving in the short term. Circumstances have since changed and I am shortly moving to the United States. I want to retain the apartment but this will mean renting it out.

I understand that I will face a clawback on stamp duty but can you tell me when that is payable - now or in an annual return? Ms M.Q., Dublin

You are right that you face a clawback on the stamp duty that you avoided paying when you first acquired the property.

The rules on this are quite clear. First-time buyers availing of a stamp duty exemption must occupy the property as an owner-occupier for at least the first five years of ownership. If not, the State will require you to pay back the amount of stamp duty that you would have paid had you not been a first-time buyer.

When will this happen? The Revenue tells me that the money becomes due on the date that you first rent the property - not when you vacate it nor on the date of your next annual return.

While this is likely to be a significant debt given the price of property in recent years, it's not really worth long-fingering it. The Revenue is entitled to impose fines for late payment.

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.