Making the most of Viridian returns

Dominic Coyle answers a selection of your questions.

Viridian has announced a return of capital to shareholders of 73p per existing share and also 10 existing shares will be replaced by nine new shares. How will this be treated for capital gains tax?

Mr K.T., email

The proposal by Northern Ireland power group Viridian to exercise a capital reduction programme along the lines you suggest has, in fact, been approved by an extraordinary general meeting of the company last week.

Effectively, the programme is designed to return to shareholders money equivalent to 10 per cent of the value of their shareholding. This is similar to an exercise carried out recently by First Active.

What happens now? Well, for every 10 shares you had at the outset you will now own nine shares in the company.

You will also have 10 B shares. These can be encashed and the sum taken in a number of different ways as I understand it. You can either take the money as a dividend, which would be subject to income tax or it can be taken as a capital gain in either September 2005 or April 2006.

The choice of dates is designed to facilitate people's differing capital gains tax situations. It will suit some people to take the Viridian payment in the current financial year while others may already have made decisions on capital gains issues as part of routine tax planning. The Viridian payment might thus leave them exposed.

The April 2006 option gives them a way of diverting the liability to next year and adjusting other transactions that might produce a capital gains tax liability accordingly.

Dividing house with siblings

My mother died last year. At the time, her name and my name were on her home (I have my own home). When she died, her name was taken off the deeds of the house.

If I want to sell this house, will it be seen as an inheritance and, as such, will I avoid paying capital gains tax (CGT) - the house is valued at €200,000 - or will it be seen as a second property on which I will have to pay CGT? If I have to pay CGT, will I have to pay it on the full value of the house?

Also, I will be dividing the property among my brothers and sisters. What is the best way to do this - i.e. give them a share before I sell it and let them sort out their own tax situation, or sell it, pay the CGT if required and then divide what is left?

Finally, one of my brothers is interested in buying the property (of which he will, in any case have a one-fifth share). If the house is valued at €200,000, he will then be giving us €160,000. Is this the way to go or should I take €200,000 from him and give him back €40,000?

Will there be any implications for him long term if he only pays €160,000?

Ms A.R., Dublin

There are several issues here. First of all, there is an inheritance issue but it only appears to affect you. When your mum died, it appears you inherited her half of the house - with you already owning the other half.

Assuming that is the case and the house is valued at €200,000, this inheritance on its own would not trigger a payment of capital acquisitions tax (CAT or inheritance tax) because the cumulative threshold for inheritances and gifts from a parent to a child stood last year at €441,148.

At this stage, this property becomes a second home. For capital gains purposes, the half you already owned dates back to when you first acquired an interest in the property. Your ownership of the second half (your mother's half) dates only to the date of inheritance last year.

As the last 12 months of ownership of a property is deemed to be as owner-occupier under the capital gains tax (CGT) rules - regardless of the reality - you appear to have a CGT liability only on the half of the property you already owned.

In terms of disbursing the property to your siblings, you appear to be facing a CGT liability anyway.

While it would certainly advantage your siblings for you simply to gift them the relevant portion of the property - on current (2005) rates, you could gift each assets worth €46,673 without them incurring a (CAT) tax liability - you would lose out as your CGT bill would eat disproportionately into your portion of the asset.

Overall, it would be fairer all round for you to sell, pay the CGT and then divide the proceeds, safe in the knowledge that at the valuation you mention, your siblings won't have a liability.

On the issue of your brother being the purchaser, you could simply sell four-fifths of the property and gift the other one fifth, which would leave him paying about €160,000 without any long-term tax implications.