Q&A

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 11-15 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.

Property

I read with interest a recent article in the paper about housing and, in particular, the tax implications in renting out one's house to a third party. Can you answer the following points? What if you move abroad for, say, two years, and you wish to rent out the house? Can you, for example, offset rent paid on an apartment abroad against the rental income on your house? Again, if you were to move abroad for a spell and rent out your house, what are the implications regarding tax if you are paid a salary abroad (assuming the only domestic income is, at that point, rental income from the house)?

Mr P.H., e-mail

Some items can be offset against rental income, but not the cost of renting another property, whether at home or abroad. Items that can be offset are directly related to the letting of the property - i.e. agents' fees, maintenance and repair, etc.

Looking at the tax situation, if you are abroad and are renting out your Irish home, tax will be deducted from the rent at the standard rate. If you have an agent, s/he will do it for you; otherwise, it is the tenant's responsibility to return this portion of the rent to the Revenue Commissioners. At the end of the year, this withheld tax will be offset against your total tax liability in Ireland.

You say your only income in Ireland would come from the house; however, the more important question is residence. Even though you are working abroad, you might still be a resident here for tax purposes.

In general, Irish residents continue to be tax residents here for three years after they have moved abroad. However, your foreign income could well be taxed in the country where you would be working. Double taxation agreements exist to ensure that you are not penalised by being taxed twice on the same income.

You would need to check the terms of any such agreement between Ireland and the country to which you would be moving to sort out the details.

Investments

I am an old-aged pensioner in comfortable circumstances in my own (mortgage-free) house, with my wife of some 50 years. We have an investment portfolio, on which we are not really dependent, 75 per cent of which is in Royal Bank of Scotland shares. In view of the present rate of exchange, should we sell these and invest in non-sterling shares?

Mr F.A.L., Galway

At a time when we hear of so many older people struggling to retain a reasonable standard of living and their dignity, it is nice to know that some pensioners are comfortable and still together, as you put it. You are fortunate to be in a position where you have this investment that you do not really need to call on at this time and you are right to keep assessing its relative merits against the alternatives.

As I am sure you are aware, it is not as simple as assessing currency risk. If it were, life would be so much easier. On the currency side, you are right in your assumption that the current rate of sterling against the euro is strong. The ongoing travails of the new European currency have consistently raised the relative worth of sterling holdings over the past two years. The question is whether this has peaked, and it will come as no surprise to you to hear that there are different views on this subject.

There is a feeling in some quarters that the euro has yet to find its true floor and that only successive interventions have prevented it from dropping to even lower levels against the dollar and sterling. The contrary viewpoint holds that the euro is fundamentally undervalued and that, like almost everything else in the market, it takes its direction from the dollar. This reading holds that recent data show the US economy is slowing down, a feature that will lead to reduced capital flows from Europe to the US and a consequent strengthening of the euro. The question is whether it will rise equally against sterling, which is also at a low level against the dollar. Again, on the "undervalued" argument, the reading is that it will.

The question is which scenario is right and, if the latter, at what point the euro will commence its renaissance. If I knew the answer to that, I would be far too busy to be writing this. What seems undeniable is that, at some point, the euro will rise and, at the moment, the rate against sterling provides a good margin of profit to anyone who has been in sterling-denominated shares for the past two years or more. The secret of playing the market, as with any other gamble, is not to get greedy. However, there is another side to the equation. If you get out of your sterling stock, where do you put your money? Will you be as successful in picking a euro-denominated stock here or in the rest of the euro zone?

Royal Bank of Scotland is a dynamic financial group, one of the largest in Britain, with a reasonable spread in its business. It is assimilating its purchase of NatWest and can reasonably expect to see this bolster its performance. It is trading close to its 12-month high. So far, so good.

Getting out of a blue-chip of this sort only makes sense if you can find a similar strong performer in which to put your money. While the Irish market has recently recovered from its run of poor form to outshine its European and, indeed, US rivals this year, it is a small market dependent on the performance of very few shares. You could always opt for the financials here but the question is whether they will perform strongly enough, allowing for the currency difference to cancel out the gains you would have made in your current portfolio.

As you have guessed, there is no right answer. The euro is likely to strengthen at some point, but a good portfolio should not be abandoned without some confidence in its replacement. Only you can determine if such confidence exists.