Dominic Coyle answers your queries.

Assessing capital tax bill for house

Is there a simple method to working out capital gains tax (CGT)? I bought a house with my wife in 1978 and have let it ever since, paying all income tax etc.

We are now thinking of selling and would like to know the CGT due. The house was bought for £14,000 (€19,000) and we understand is now worth €480,000. My wife and I are now retired and are assessed jointly for tax.

Mr F., e-mail

Nothing is ever entirely simple when it comes to tax, but there is a reasonably easy way of working out your capital gains tax liability on this property.

The first thing to determine is your base cost. You state that this was £14,000 back in 1978. Contrary to your figures, this translates as €17,776, not €19,000.

The important thing to remember is that costs associated with the purchase and disposal of the property, including legal fees and estate agency bills, are allowable against capital gains tax.

The second is that, at least up to the end of 2002, the Revenue laid down indexation multipliers that were designed to mitigate the impact of inflation on the value of your asset. At that stage, then finance minister Charlie McCreevy ended indexation relief.

Before allowing for indexation, add to the £14,000 purchase costs the fees incurred at the time of purchase. To convert the total sum to euro, divide by 0.787564.

Depending on whether the house was bought before April 5th, 1978 or after that date, the multiplier to account for inflation will be 4.49 or 4.148 respectively.

To illustrate, assume the property was bought in May 1978 and had relevant acquisition expenses of, say, £1,500. The euro equivalent of the total purchase cost (£15,500) would be €19,680.

Using the 1978/79 multiplier of 4.148 that would apply in May of that year, the indexed purchase price is €81,633.

On the basis of a current value of €480,000, and before allowing for selling expenses, your capital gain is €398,367. The first €1,370 of any gain in a given year is exempt from capital gains tax. This is not transferable so, if the house is in one name only, you will get exemption of only €1,370; if both your names are on the deeds, that amount will be doubled.

Assuming only one name is on the deed, you have a rough gain of €397,000 which would be liable to tax at 20 per cent - or €79,400.

You will, of course, need to adjust the figures above to allow for your actual purchase and selling expenses, but the same method of working out your liability applies.

Advice on PRSA

I have taken your advice and gone to the bank and stated that I wished to invest €7,500 in the PRSA scheme.

The bank's adviser told me that the scheme does not make sense for someone on 42 per cent income tax. The reason being that although the Government pay €2,500 tax free on the €7,500 invested income, tax at 42 per cent is charged on the €7,500.

If this is correct, €3,150 is deducted from the €7,500 leaving €4,450. The net result is that an investment of €7,500 becomes €6,950 producing a loss of €550. If this is correct, this is an extraordinary pension scheme for investors who pay 42 per cent income tax.

Mr B.B., Kildare

The bank is correct that this scheme does not really make sense for people paying income tax at the higher 42 per cent rate.

However, income tax is not charged on the €7,500 invested, What does happen - as with all pension payments - is that relevant income tax is charged on money drawn down from a pension. The level of this income tax depends on your earnings at the time.

The €2,500 payment on transfers of €7,500 to a PRSA from an SSIA amount to a 33 per cent bonus. Clearly if, as a pensioner, you are paying tax at 42 per cent, the Cowen initiative is not for you as you would pay €4,200 tax on the €10,000 PRSA investment (your €7,500 transfer and the State's €2,500 bonus) leaving you with just €5,800.

The real beneficiaries of the scheme are less well-off pensioners who are paying little or no income tax.

• 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.