Q&A

Dominic Coyleanswers your questions.

Tax breaks from working at home

I often work from my home and understood that I should be able to claim certain expenses against bills. However, my accountant tells me that, if I do so, I may lose my capital gains tax exemption on my home if I decide to sell in the future. Is that the case?

Mr H.P., Dublin

It will probably come as little surprise to learn that, as with much of tax law, there is not really a black and white answer to your question. Essentially, it comes down to a matter of interpretation. Having said that, it strikes me that your accountant is being unnecessarily cautious on this particular issue.

To explain from the top, you have an exemption on capital gains on the sale of your Principal private residence - i.e. your main home.

However, in the same way as this is compromised if you rent the property, it can also be affected by use as a workplace.

The relevant section of the tax code is section 604 (6) of the Taxes Consolidation Act 1997. It reads: "Where the [ captial] gain accrues from the disposal of a dwelling house or part of a dwelling house part of which is used exclusively for the purposes of a trade, business or profession, the gain shall be apportioned . . . "

The important term here is the word "exclusively". In other words, if you have a room that is set aside purely for work, then that portion of the property will be liable to capital gains if and when you sell the property.

However, the truth for most people is that the room in which they work also doubles with other uses - a guest bedroom, a kitchen table or a dining room.

Having dug into section 604 (6), you will be delighted to hear that you also need to consider the associated Tax Instructions 19.7.3.10 and 11. Avoiding this sort of trawl through the arcane elements of the Irish tax code is, of course, is why most people in your situation employ an accountant in the first place.

The key thing, really, is whether one is "is engaged under a contract of service (an employee) or a contract for services (self-employed)". If one is an employee, 19.7.3.11 indicates that work from home related to the person's office or employment - such as e-working - the CGT exemption on your home is not affected.

Where you are self-employed, there may well be an assumption that your home is your workplace and this could impact on the CGT exemption. However, several accountants to whom I spoke on this issue were of the opinion that claiming modest expenses in relation to working from home are unlikely to jeopardise your CGT exemption. If, however, you claim expenses on a quarter of household bills, then you are indicating that a quarter of the property is used in connection with your work and that will very probably leave you open to a Revenue assessment that something around a quarter of the property is used exclusively for your work. As usual in these things, it comes down to common sense and interpretation.

SSIA and pensions

With regard to the recent query from RK in Galway in connection with his 60-year-old wife wanting to invest in the PRSA scheme, I am 67, still working and drawing the contributory social welfare pension. I will receive my SSIA at the end of April. Is it possible for me to buy into this scheme? My income is less than €50,000.

PK, e-mail

It is perfectly possible for you to avail of the scheme. The only inhibitors are that your income should be less than €50,000 and that you pay income tax at no more than the standard rate.

The incentive scheme sees the State pay a €1 bonus for every €3 you transfer from your maturing SSIA to a pension.

In addition, you do not pay the 23 per cent exit tax due on any sum transferred to such a pension product. The fact that you are currently in receipt of a pension is irrelevant in this context.

However, you do need to make the transfer within three months of the SSIA maturing.

Gross versus net funds

I would be grateful if you explain the difference between Irish Domestic Funds (Gross) and (Net) as displayed in Irish Timeseach Friday, particularly on the tax liability, if any, I would have if I cashed in a Net fund which I have.

T.D.C.,Offaly

The difference between net funds and gross funds is a matter of tax. With net funds, which are older products that are no longer sold, tax on the gain in the fund is deducted each year by the manager at the standard rate - currently 20 per cent - and paid over to the Revenue, thus the fund grows "net" of tax paid.

Back in 2001, the regime was changed to bring Irish funds more into line with international practice. This new regime was called "gross roll-up" and these funds are now termed gross funds.

Under this newer regime, the gain on the fund rolls over each year, with this new gross sum becoming a new larger capital base sum for investment the following year. The idea is that, by grossing up the investment gains, the customer is maximising the potential investment gain.

The Revenue only taxes the fund when it is drawn down. To compensate the Revenue for the fact that it has forgone annual tax on the fund on an annual basis, this exit tax is levied at the standard rate plus three percentage points - i.e. 23 per cent at present.

Again, this exit tax is deducted by the fund manager or life company that manages the product in which you have invested.

It might be worth checking to see if you would be better off switching to a gross fund but you should ensure that any such recommendation is underpinned by solid explanation - and not just an effort to get you to open a new policy on which the company will earn more commission.

• Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara 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.