Sunday times - A Question of Money - April 17

Posted by Jill Kerby on April 13 2011 @ 09:00


Diversify and conquer dangers to your deposits

JH writes from Cork: I am a pensioner in my late sixties who has a few deposit accounts and investments each under €100K invested in a number of financial institutions in this country and a last ditch deposit with Rabodirect. The investment money is not required for everyday expenses. I am attempting to look ahead to 2013 and am nervous that the deposits and investments here might not be safe in the event of Ireland defaulting on it's loans and perhaps the Euro collapsing.  I am considering shifting money abroad into US dollars, sterling and New Zealand dollar accounts. Can I do this legally and what are the risks apart from currency fluctuation? Also, would I have a tax liability here on interest earned outside the state and if so, could I claim credits for interest paid abroad? Since there are a number of financial institutions located in Northern Ireland, can you say which ones are guaranteed by the UK government?  


Before you do anything, you need to properly assess the risks associated with your savings and investment accounts. This means ticking boxes issues such as institutional solvency, currency strength, guarantees that may apply and appropriate asset selection in the case of your investments. It sounds to me as if you could use a proper wealth review by an experienced, fee-based independent advisor. If you have bulk of your funds in cash – here or anywhere else in the eurozone – you need to know that this carries inflation risk, aside from potential euro currency risk.

As price inflation rises, it will eat away at the spending power of your capital and you will need to achieve an annual return that beats both the rate of inflation and any deposit interest retention tax (DIRT) liability. Moving your funds to the UK is like jumping out of the Irish frying pan into their inflation fire if you intend to spend any of your money there: as of February, the annual UK retail price index (as opposed the more general consumer price index) is running at 5.5%.  Add 27% Irish DIRT on any returns from UK deposits, and your capital spending power depreciates (in the UK, at least) at a rate of 6.5%.

 I’m all in favour of diversifying away from euro only deposits in Irish banks as one of a number of ways of protecting your wealth in these volatile and uncertain times. But you need a sound, cost and tax-effective plan BEFORE you rashly move all your money off-shore or into other deposit accounts. 

 Banks is Northern Ireland, including those owned by AIB and Bank of Ireland are covered by the UK financial services compensation scheme up to a maximum of £85,000 (€95,500) per customer per bank. You can check here (http://www.fsa.gov.uk/Pages/consumerinformation/compensation/limits/index.shtml) for an overview of UK financial compensation schemes.


Show your metal

Mr SK writes from Co Sligo: On January 28, 2000 I invested €50,789.52 with New Ireland in two Evergreen funds and a European Securities Fund. Between them the units were worth €54,272.31in October 2010. Should I cash I the above or leave it for the present?

 Oh dear. The fund values you have been quoted do not include the 30% exit tax that you will have to pay on the €3,483 ‘profit’ your funds have earned, leaving you with a net profit of €2,438 on your initial investment or a cumulative return of 4.8%.  Divide this by 11 years (now) and you have achieved a net return of less than 0.41% per annum. Adjusted for inflation, which in Ireland is reckoned at about 2.6% per annum over the lost decade you’ve lost over 26% of the spending power of your original investment. 

 Had you simply left your €50,272.31 on deposit since 2000, you would have earned a real, inflation adjusted return of - co-incidentally -  0.4%, less DIRT, according to a recent Credit Suisse (?) survey.

Deposit accounts come with their own downsides, but they were clearly superior to poor performing, high cost investment funds. Can I suggest instead of leaving all your money in cash – if that is what you decide – that you at least consider converting a small amount of it into ‘real’ money as well – gold and silver, that can’t be devalued at the whim of central bankers and that in the past has performed well during periods of inflation?


Rent clawed back

 HN writes from Dublin: Soon after purchasing his house in 2007 a nephew of mine lost his job in the construction industry and was forced to emigrate to the UK to seek employment, save his house and honour his financial commitments. He has had no option but to rent the house to supplement its outlay of mortgage, insurance, upkeep etc.

 Under the current tax code I'm told that he has incurred a tax liability (in the region of approximately €9,000plus interest penalties by letting out his house within 2/5 years of purchase as a family home. Is this correct? Surely this is not equitable or right in this current environment? Finally, I understand that properties governed by the Mortgage Code of Conduct are (a) family homes or (b) the only property owned by an individual within the State?

 To qualify for an exemption from stamp duty as a first time buyer, your nephew had to be the owner-occupier.  Because he purchased his house before December 5, 2007 and then rented it quite soon afterwards, that relief would be subject to a clawback.  Until that date the claw-back period was five years; for purchasers after that date the claw-back period was reduced to two years. 

 From your letter it sounds as if it isn’t just DIRT relief that accounts for his tax bill.  If he did not declare his rental income or file an annual tax return, he would have also incurred penalties, to which you refer.  Fair or not, these were the regulations that applied to getting the property tax break in the first place.  Your nephew should consult a good tax advisor to see if he has any wriggle room with the Revenue Commissioners.

 The Mortgage Code of Conduct specifically refers to family homes only and not investment or rental properties, but Ulster Bank told me recently that they are meeting with customers having problems repaying their rental properties in order to restructure these loans without resorting to legal procedures.  Your nephew should also make an appointment to see his Irish mortgage lender.





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