Jill Kerby

ARE YOU READY?  PROPERTY TAX VALUATONS START ARRIVING NEXT WEEK

Starting next week every homeowner will receive a notice from the Revenue that includes some guidelines on how to value their property for local property tax (LPT) purposes as well as the Revenue’s own estimation.

If you accept the Revenue’s valuation, then all you have to do is sign the declaration of chargeable value and send it back to them with the half-year payment by May 7 or May 28 if you pay on-line. If you believe you qualify for either an exemption (say, as a new first-time buyer, or live in a ghost estate) or a deferral (because you are on welfare, or have a very low income), you still need to fill out the appropriate application and return them both to Revenue. (Go to www.revenue.ie for the official LPT Guide.)

 If you opt to do your own valuation, you might want to get cracking: late returns and payments will carry stiff penalties and by July 1, the Revenue will take action to just take the tax payment from your wages, your bank accounts, from your social welfare payment or farm payments.

 The legislation permits them to enter and inspect your home if hey so wish, and they can reopen your file and question your valuation at any time during each LPT payment term (3.5 years from mid 2013 to November 7, 2016, but four years thereafter) even if you’ve agreed with their valuation.

Making a false declaration, or refusing to make one, both carry fines that start at €500 per month and rise to €3,000. Delaying your payment carries an interest penalty of 8% per annum on any arrears. Even opting for a deferral – which only applies if you are on a very low income, will incur a cost 4% per annum interest charge whenever you do get around to paying the back tax.

Not paying LPT on time could also trigger a wider audit of your income tax or corporate tax position and should you decide to sell your house between now and November 2016 when this first LPT valuation term ends, there is a €500 fine for not disclosing the LPT to a buyer. (Who would buy a house without finding out the LPT first?)

Bizarrely, the legislation also obligates a buyer who has reason to believe that the LPT, as declared by the seller, is too low and was not “a fair and honest valuation”, to report their concern to the Revenue.

This “snitch” clause, as it has become known, can only really be triggered if the new purchase price pushes the house into a higher tax band. For example: the property is LPT valued for the first time on May 7, 2013 at €300,000. On July 7, 2015, the new owner pays €375,000, pushing the property into the next, higher tax band. If the purchase doesn’t trigger a higher tax band, the new buyer pays the same LPT until the next valuation term and has no reason to make a new valuation submission and continues to pay the same LPT until November 2016.

A new owner couldn’t possibly know how or the seller came up with their original valuation back in May 2013. All they can know is why they were willing to pay a higher price for the property, months or years after the previous valuation date.

However, if the Revenue also decide, on foot of a notice by the new buyer that the original declaration was “too low” and is now higher, they have the power to pursue the seller for the tax shortfall from 2013.

“The only reason why Revenue are in charge of property tax valuations and collection,” Karl Deeter of Irish Mortgage Brokers and Advisors told me last week, “is because everyone is afraid of them. No one is afraid of the local authorities.”

So that pretty much sums up any chance of avoiding this tax, or even delaying its payment. 

The Revenue, in their deadpan fashion, insist that the LPT is a self-assessment tax, despite including their own valuation with the declaration form (rather than just providing guidelines on how to come to a valuation) plus warnings of dire consequences if you submit a lower valuation with which they may challenge at any time.

The government is probably hoping everyone will be too intimidated to challenge the Revenue valuations.

 They could be right. 

But if you believe that you are better placed than the Revenue to come up with a “fair and honest” valuation of your property, and you are courageous enough to challenge the Revenue valuation, next week’s column will look at many different methods and sources you can use to achieve that valuation.

And if any of these should provide a higher valuation than the Revenue one, you can, perversely, still opt for theirs’. 

TAXING TIMES AHEAD AS SNEAKY AMRF RULE CHANGES APPEAR IN FINANCE BILL

You had to look closely, but last Wednesday, yet another sneaky ‘wealth’ tax was put into law, and it won’t just be paid by the wealthy.

The Finance Bill 2013 – which was passed by the houses of the Oireachtas on February 13, has changed the rules that regulate the way that AMRF / ARF post retirement fund operate.

Mainly the property of retired self-employed people and business owners or holders of personal retirement savings accounts (PRSAs) all approved minimum retirement fund (AMRF) holders will be paying more tax for the next three years.

AMRFs and ARFs – approved retirement funds – allow for pension funds to continue to be invested after retirement, rather than automatically being used to buy an inadequate pension annuity income for life.

Depressed bond rates are the culprit: for example, a man, aged 65, retiring this week with €150,000 in pension savings would end up with an income for life of just c€6,400 a year and just two thirds of that amount for his wife in her widowhood. That’s just €123 per week for them and in widowhood, just €82 per week for her.

Is it any wonder that since they were introduced, the majority of qualifying retirees have opted to buy an AMRF/ARF instead? These funds allows the retired person to draw down interest from the AMRF and, from the ARF both interest and capital. All interest/income is subject to income tax.

Unable to leave good enough alone, the government soon decided that at least 3%, then 5% of the ARF had to be drawn down every year and income tax on it paid to the state even if the person didn’t actually want or need to draw down any income in that particular year. (This is called ‘imputed distribution’.)

Then they changed the terms that applied to who had to have an AMRF and who could only have an ARF.

Under the original rules rom 1999,  if at retirement the pensioner didn’t have a separate guaranteed pension income of at least €12,700 (which could include their state pension) they had to invest at least €63,500 of their retirement fund into an AMRF and could only draw down the interest. The balance would be invested into the ARF from which you could draw down interest and capital.

A couple of years ago the AMRF minimum was raised to €119,800 if you didn’t have a guaranteed pension income from other sources of at least €18,000 a year. The purpose of the higher AMRF, said the (nanny) state, was to make sure that enough capital for old age was always preserved.

This year’s Finance Bill (now Act) has changed the rules again. The €119,800 AMRF / €18,000 requirement has reverted back to the original €63,500 and €12,700 combination, but only for the next three years.

Why has the government done this, pension experts are asking?  It obviously has nothing to do with a paternalistic concern that pensions don’t run out of their capital. The ones I’ve spoken to say it comes down to the fact the €119,800 required to be left in an AMRF is not subject to the 5% capital drawdown that pertains to ARFs and on which the government collects income tax.

“This is nothing but another tax-grab”, said one disgusted independent financial planner. “The government needs money. Raising the AMRF limit back-fired. They are now finding new ways to squeeze more tax out of old sources.”

What it means for the AMRF holder is that at least €56,300 worth (€119,800 - €63,500 = €56,300) of their pension assets will have to be shifted into their ARF. If they already had say, €100,000 in their ARF, they would have been liable to pay their top rate of income tax on €5,000 they had to draw down as pension income or €1,000 at 20% standard rate tax and €2,050 at 41% top rate tax.  Now their ARF fund will be worth €156,300 and or €7,815 will have to be drawn down, not €5,000. Their new tax bill is €1,563 if they pay tax at 20% or €3,204 if it’s 41%.

In both cases the tax they pay has jumped by over 50% while the percentage amount of their own money they must draw down has remained at just 5%.

This is not just a disproportionate tax move, but it is also discriminatory (it doesn’t affect occupational or public sector retirees) and, well…sneaky.

The government will say it only affects the very wealthy.  This isn’t true. Anyone who had to take out the AMRF had limited retirement funds to begin with and as a sole trader or small business owner had no union and probably no trade body to defend their interests.

If you are an AMRF holder, speak to your financial advisor as soon as possible. There was absolutely no lead in time given for these changes. The pension experts I have spoken to say there could be complications – and costs involved - in shifting some of your investments out of the AMRF vehicle and into the ARF. 

Ends

BE EXTRA CAREFUL WHEN RENEGOTIATING MORTGAGE DEBT

Is a long term, variable rate interest-only repayment deal with your bank the ideal way to pay off what is otherwise considered untenable debt?

The government seems to think so. Most TDs think so. The ECB seems to think so.  And so, a long term interest only deal has been arranged and the c€31 billion IBRC promissory millstone (the bad loans of Anglo Irish Bank and Irish Nationwide) has been turned into national debt that will only be paid off in 40 years.

The government says this is acceptable because it secured a low, but floating interest rate and by the time the capital has to be repaid, the economy will have recovered and natural inflation will reduce the impact of the final payment for our children and grandchildren, whose tab it will be.

Perhaps. But if a deal like this is good enough for the taxpayer, is this the sort of deal you should be seeking with your bank right now if you too have untenable mortgage or other debts that you simply cannot pay on a capital and interest, shorter term basis?

if there was a chance that your bank would renegotiate even your mortgage debt once and for all, would the pluses outweigh the minuses?

On the plus side, a 40 year mortgage will always reduce the cost of a more conventional 20 or 25 year homeloan, whether paid on a capital and interest basis or interest-only.

For example, a €310,000 capital and repayment loan paid over 40 years at a tracker rate of say, 2.25% (0.75% ECB rate plus 1.5% premium) will cost just €976 a month compared to €1,325 over 25 years. However, the total interest cost of the 40 year loan is €158,586 plus the €310,000 oustanding capital. Over 25 years, you’d pay €94,600 interest plus the €310,000 a genuine savings of nearly €64,000.

If you paid only interest (at 2.25%) for the 40 years your monthly repayments would fall to just €581 a month but over the 40 years your total interest payments would rise to a whopping €279,000, and you would still have the €310,000 capital to repay.

And while inflation will have eaten away at the real cost of that capital loan, will you have (assuming you are still alive) sufficient savings or income to pay it off at year 40? Will your lender let you “roll-over” the loan? More to point, how would you feel if you had to sell the house to clear the debt?

All these figures assume that your tracker-like interest rate never changes. But how likely is the ECB rate to remain at 0.75%? This rate has been artificially suppressed by a prodigious amount of money printing and bond buying since 2008; it will go up.

A 4.25% interest rate (ECB of 2% plus a 2.25% premium) turns a very benign monthly repayment into a horror story: instead of paying €581 interest-only, you will pay €1,328 a month and your total interest bill over 40 years increases to €327,660.  That original €310,000 loan ends up costing you €637,660!

This is the problem with the government’s new promissory note “mortgage”.  The interest bill isn’t likely to stay at c€800 million a year and the total cost will not be as insignificant as they are suggesting. Meanwhile, there remains another €137 billion of national debt to repay, or rollover endlessly.

Contrary to the political view, it is always better to pay off mortgage debt sooner than later. It is also always better to face the facts:  if your debts are so great that you need extraordinary refinancing deals…then you should also consider the default option and sue for the most favourable insolvency or bankruptcy deal you can get.

Ironically, the government hopes that our retail banks will agree to the new six year Personal insolvency Arrangement for customers with untenable mortgage debt – that is, a six year ‘receivership’ period in which as much secure and unsecure debt as possible is repaid, after which the remaining amount is written off at year six with the majority of debtors keeping their family home and able to move on, debt-clear.

It’s the deal they failed to negotiate with the ECB themselves, and one wonders how inspired the retail banks will be to agree to such terms with their own debtors. Will they prefer the drawn out, 40 year sort of ‘solution’?

Before you ever agree to a long debt deal, consider all the costs and consequences to you and your family. A good, independent financial advisor should be consulted before you ever sign up to any informal debt repayment agreement.

Meanwhile, we can only hope that the new Personal Insolvency Practitioners (PiPs) will be fighting tooth and nail for a fair deal for their clients later this year when the national insolvency service is open for business.

Debt serfdom – being forced to repay loans that were never sustainable in the first place for the rest of your life (and which your family may inherit) - is something I wouldn’t wish on my worst enemy.

jill@jillkerby.ie

STILL INVESTING IN PROPERTY? APPROACH ‘REITS’ WITH CARE

There are a different ways to invest in property. You can buy a house or apartment outright, or with a mortgage and rent it out, earning an annual return. Landlordism, however, is not for everyone.

 You can buy property with a group of people and hire someone else to run the ‘syndicate’ for you. The rent covers all the costs and taxes and it may pay a dividend. Most people hope to sell at an agreed date and make a capital gain profit.

 You can also buy a pooled property fund usually from a life assurance or investment firm and after a period of years the fund matures (after the properties are sold) and you, hopefully earn a profit.  These funds remain untaxed until maturity but the maturity date can sometimes be a moveable feast…especially if there is a property crash.

There’s another way, and it is only becoming available in Ireland this year, after finally being announced in the 2013 Budget:  Real Estate Investment Trusts or REITS.

 An alien, landing his spaceship in the middle of the great bog of Allen and looking at the great devastation that property investing has wrought in every direction for about 300 miles would wonder about the arrival of REITS, and especially about the cheerleaders, who certainly include the 400 property, financial, accounting and legal industry practitioners who showed up at a Dublin Conference organised by the REITS Forum, a trade body.

Real Estate Investment Trusts, to begin with, have nothing to do with trust law anymore, though that moniker has stuck. Instead, they involve privately listed companies on stock exchanges which invest in portfolio’s of property that they then administer and collect rents on behalf of the REIT shareholder.

The attractions of a REIT, over direct ownership, syndicates or property funds include that they are more transparent: the share price is what it is on any given time of the day and shares can be traded.  The portfolios are often quite large and diversified thereby spreading shareholder risk.  And they attract special tax treatment: REITS don’t pay corporation tax, though they are liable for tax on rental income and shareholders pay income tax on dividends and CGT on capital gains (if the shares are sold.)

What the new REITS proposers want investors to believe, is that they are less risky than any other form of property investing because there are limits imposed on ‘leverage’ and the more generous way profits are distributed.

 According to the REITS Forum, (www.reitsforum.ie) if we’d had a healthy REITS market during the Tiger years, there would have been fewer “overpriced, over-geared, and undiversified single asset investments”.  They insist that these “competently constructed and well diversified portfolios… will be proactively managed by specialist financial professionals.”

 Hmmm.  That’s what every accountant or stockbroker who flogged Hungarian supermarket investments to ‘syndicates’ of wealthy doctors, or the complicated ‘mezzanine” finance deals stuffed full of student housing in the north of England were also presented.

Many amateur landlords who thought their pension was guaranteed by buying two or three buy-to-let apartments in the wilds of Leitrim  (or west Dublin) were also advised by property “professionals”.

 REITS are just another way to trade an asset on the stock market – this time a company that invests in properties and collects and distributes rental profits to shareholders.

Financial advisors say that they can diversify your existing pension fund that happens to be short of property or round out a wider portfolio of personal assets that includes your income, your family home, savings accounts, life assurance protection, shares, bonds and any other asset you may have.

“What people want to avoid,” one said, “when the hype about REITS and how ‘safer’ they are is that a REIT is all you need if you are interesting in investing in property.”

So how can you buy a REIT? As the REIT companies are listed on the Irish Stock Exchange in the next few months all you have to do is contact a stockbroker or use your own on-line trading account to buy one. The arrangement cost is whatever commission you pay the broker or that applies to your e-account.

REITS can be included in pension funds and post-retirement (ARFs) Approved Retirement Funds, so discuss the purchase with your independent pension advisor. Make sure you fully understand all the exit and tax implications of your REIT.

And finally, do not forget that all property is subject to the volatility of the markets. Much Irish residential and commercial property is better value now than at any time in the past decade, with really decent rental yields. But there are many ways to make money…and to lose it.  REITS deserve to be treated with equal measures of care and scepticism.