Relief on capital gains in case of dependent relative

Q&A: Q My mother, who had purchased a house jointly with her sister, bequeathed her half share to my siblings and me on her death 25 years ago. We allowed my aunt continue to occupy the house (rent-free because she had limited means) until her recent death. Her half share has been bequeathed to other relatives and, the house having been sold, my siblings and I have received our inheritance 25 years late.

Having had no option morally, and probably also legally had it gone to that, but to allow our aunt to occupy the house for the remainder of her life, we are at a loss of income over the period. However, on the face of it, there would appear to be a CGT liability which I believe is inequitable in the circumstances.

R.C., Dublin

AYou clearly understand that, as a general rule, capital gains is liable on an asset received via an inheritance and sold some time later. However, there are some reliefs and your case appears to fall under one of these.

I understand your aunt was elderly even when your mother died all those years ago.

Under section 604 of the Taxes Consolidation Act 1997, the bible of tax legislation in the State, there is what is known as principal private residence relief available in relation to a house that is provided free of rent to a “dependent relative”.

In this regard, a “dependent relative” is defined as a relative incapacitated by old age or infirmity from maintaining themselves.

The relief works by considering the property, for the purposes of CGT, to have been a principal private residence (which is exempt) for the period concerned. The property must also have been the sole residence of the dependent relative for the years in question. The net result from your point of view is that there appears to be no capital gains charge due on the property – at least until the passing of your aunt.

This does not, in any way, impact on your actual principal private residence – your own home. The one restriction is that you can claim this relief in relation only to one property at any one time.

Q I have money invested in an Evergreen fund. I did not know at the time that it was not guaranteed. I invested €20,000 and it is now down to €13,000. It is due to mature in two years’ time. I dont know if I should take it out or hope for an upturn.

I dont understand what it is invested in. They are smart funds. Do you think that things might improve and I should wait? I know you cant advise. But I am going out of my mind with worry. I am separated and cannot afford such a hit. I have never gambled in stocks before and I dont know how I ended up in this. All I wanted to do was put it safe to gain interest. They had gone to €16,000 a couple of weeks ago and I was tempted to take them out . . . too late. What are smart funds . . . what should I do?

Ms C.McK, e-mail

AThere are a number of separate issues here and, to my mind, the most serious among them is that you are unaware of the precise nature of your investment.

By your own admission, you have not invested previously in stocks and you were looking for a safe investment for your money where it could accumulate some interest. Quite how an adviser put your entire holding into an equity-based investment under those circumstances I have no idea and I think you need to find out the answer.

The Evergreen funds are marketed by Bank of Ireland and its subsidiary New Ireland. They have been around a long time and, to be fair, have generally outperformed the sector.

One of its virtues in good times was that it was less heavily weighted in equities than many rivals. To compensate it was generally overweight in property.

Of course, that asset balance came back to haunt them when the Irish property and stock markets both collapsed in recent years and the fund is now nursing losses.

There have been a whole series of these Evergreen funds – sold within the Smart Funds portfolio – down the years. However, they are listed as “growth funds” even on the bank’s own website with a “medium to high risk” rating. The attendant ratings state that “investors’ capital is not secure and can fluctuate, sometimes significantly, and investors may get back less than they originally invested”.

The picture is somewhat blurred by the fact that there is a “guaranteed” version of the Evergreen fund, also managed by Bank of Ireland. The guaranteed fund, as far as I gather, opened in October 2005 and matures in 2011, which would chime with the details in your letter.

The guaranteed fund operates by investing a portion of your money in the standard Evergreen fund with the balance held in a fixed interest account. Initially, 20 per cent was in Evergreen though this figure changed over time in accordance with market performance.

The fund guarantees to repay investors at least their capital – but only on the sixth anniversary of their policy, unless they die earlier. If you seek your money earlier, you forsake the guarantee and will receive only the current value of your original investment. As you note, in your case, this would currently see you nursing a loss of some €4,000 on your original investment.

So what should you do now?

First off, you should go back over your paperwork and see what was decided in writing at the time.

Do you hold an investment in an ordinary Evergreen Fund or, as sounds more likely, the guaranteed fund.

If it is the latter, you would ordinarily have no qualms at this point about waiting for the maturity date. However, the guarantee explicit in this investment is only as good as the viability of the bank issuing it and, as we now know, none of our banks is weathering the current financial crisis very well.

A State emergency guarantee has been in place since September 2008 but this runs out in September 2010 – before your policy matures.

The Dáil and the EU have approved an extended guarantee that will operate until 2015 in some circumstances but this has yet to be triggered by the Minister for Finance. It is not totally clear at this stage what will be covered as the original EU approval spoke only of guaranteeing products issued between December 1st, 2009, and June 1st, 2010. It remains to be seen where this would leave you.

If you are, in fact, invested in the standard Evergreen fund and the investment does not meet the criteria agreed when you first approached the bank, you could have a case against it for compensation, which could be taken ultimately to the financial services ombudsman.

Please send your queries to Dominic Coyle, QA, The Irish Times, 24-28 Tara Street, Dublin 2 or to dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice. There may be a delay in answering questions.