Jill Kerby

ARE YOU COUNTING ON YOUR HOME TO BE YOUR PENSION? 

Alarm bells always go off in my head when I hear from readers who suggest that their family home, ‘is going to be my pension’ some day. 

This is a pretty common illusion, and not just here in Ireland. A recent survey in the UK, where the private pension take-up (of about 50%) and the high dependency on the state pension (again, about 50%) mirrors our own low coverage and savings, is that more than two out of five (41%) of homeowners in the run-up to retirement are now banking on their family home to supplement pension income. Just over half of younger homeowners in the 45-54 year age group also say that their family home will have to make up part of their pension some day. 

So are nearly half of all retirees really guoing to sell their home and live off the proceeds?  Are they all going to all rent out spare rooms – tax-free in both our countries under respective Rent-a-Room schemes - to supplement their low pension income?  Will they revert to home equity release loans that don’t have to be repaid until they die (or sell the property)? 

(The UK survey found that as many as 27% of homeowners aged 65+ would opt to access tax-free equity in their homes before accessing retirement savings that are liable to income tax.)

Let’s look a little closer at each assumption and see whether they hold up financially. 

A great advantage of home ownership, after the ‘utility’ value of having a roof over your head is that there is no capital gain tax liability when you sell your property. Tax free proceeds could go some way to boosting an inadequate pension income if you can find a cheaper property to buy or rent. However, leaving a much loved family home/garden can be emotionally wrenching and you need to accept that ownership still means paying insurance, rates, utilities, maintenance costs and property tax. (Property related taxes can be substantial if you decide to move abroad.) 

The way to mitigate these bills and boost your pension income is assumption number two, the €12,000 a year tax-free Rent-a-Room scheme which is like getting another annual state pension in income every year, without a tax bill. (It may trigger a social welfare means test, especially regarding payment of a non-contributory pension, that is, unless the owner was already living alone. 

The obvious downside of the Rent-a-Room scheme is that you have a stranger or strangers living in your home, perhaps using a shared bathroom and your kitchen facilities unless you can offer them an en-suite bedroom or say, an attached granny-flat with a kitchen. (Elderly neighbours of mine who would otherwise be alone and who rent rooms to nurses from St James’ Hospital in Dublin are delighted with their Rent-a-Room lodgers.) 

The third assumption – home equity release – has not resumed in Ireland, but is still available in the UK, where house prices never crashed from 2008 and are still very high. 

Equity release allows you to borrow a percentage of the value of your home (usually starting at 20% if you are 60 or over) without having to repay it in your lifetime if you remain in the property. In the case of Seniors Money, which had been the most active lender before they suspended lending in 2012, the loan amount then goes up by an additional 1% per year of age. 

‘Lifeloans’ or ‘reverse mortgages’ as they are known, must be repaid either from the borrowers estate after death, or from the proceeds of the sale of the house and the interest (which continues to accrue) is usually several points over the typical mortgage rate. Both interest and capital must be repaid. 

The downside of equity release is that the value of the property might go down (as it did post-2008) and there will be less for heirs to inherit or for the owner to use if the home must be sold, say to pay for residential or long term nursing care or because they want to downsize.  

Seniors Money always guaranteed that borrowers would never be in negative equity, that is, where the reverse mortgage was worth more than the market value of the home – but in the worst case owners could find that while they continued to live in the property, they no longer owned any equity in it and wouldn’t until market values went back up.

There are other ways to earn some money from your property – by selling part of a large garden (ideally with planning permission in place); by renting out an unused off-street or garage parking place (there’s bid demand in city centres for apartment parking) or even renting storage space in your house.  And let’s not forget about Airbnb. 

But will it be enough to boost your pension, after tax?  

The only way to ensure that outcome of course is to start saving and investing early for a good private pension from day one.  Either way, take professional financial and tax advice first. 

If you have a personal finance question for Jill, please email her at HYPERLINK "mailto:jill@jillkerby.ie"jill@jillkerby.ie or write to her c/o this paper.

CONSIDER ALL THE TAX IMPLICATIONS BEFORE YOU ‘AIRBNB’

In a fight between the Revenue Commissioners and the owners of the 9,000 Airbnb listings from Ireland, I know what side I’d back. 

Last week’s announcement that Airbnb had handed over the listing details of their Irish website users to the Revenue shouldn’t really come as any surprise to the people who’s been listing their rooms or properties for the past two years. 

Back in February the Revenue made it clear that they did not consider Airbnb earnings as qualifying under their Rent-a-Room scheme which allows for up to €12,000 worth of tax-free income from residential lettings of rooms in a person’s home.

According to the Revenue, the rent-a-room relief only applies to rooms rented on a long-term basis. “Income from the provision of accommodation to occasional visitors for short periods would not qualify for rent-a-room relief as the visitors use the accommodation as guest accommodation rather than residential purposes.”

Judging from reports in the papers and on the airwaves a lot of Airbnb hosts are not happy that their details have been handed over to the Revenue or that they may have to pay tax. But even on their website, Airbnb has always maintained that the onus is on the host to determine whether they have to pay tax or not (in the UK, they do not) and this may include VAT as well (which it does in Ireland.)  

It suggests that if tax is payable, “you can usually either incorporate it into your nightly price, add it within a ’Special Offer’ or ask your guests to pay it in person. In each case, it's important that guests are informed of the exact tax amount prior to booking. If you choose to collect tax outside of your listing's rates, please note that it should be collected only upon arrival and that we are unable to assist with collection.”

There has also been some speculation as to whether Airbnb will challenge the Revenues’ decision not to allow the rent-a-room relief on Airbnb earnings.  But the tax is not payable by Airbnb and if any challenge was going to happen surely it would have been last February when Revenue made it clear that Airbnb lettings – which are commercial and short-term - did not qualify under the rent-a-room scheme definition. 

Since most Irish Airbnb hosts only began listing their properties in 2014, they are still within their tax reporting deadline: rental income for 2014 only falls due on October 31, the first file and pay their tax. (It is mid-November if you file on-line at  HYPERLINK "http://www.ros.ie" www.ros.ie.)

According to Sandra Gannon of TAB Taxation Service (and my co-author of the TAB Guide to Money Pensions & Tax 2015) “if you have income from Airbnb you can claim all sorts of expenses to reduce any tax bill. These include a portion of your heat and light bills, broadband or phone, insurance, food you may provide, your laundry costs, a certain amount for fittings and even Airbnb’s fee. Rental income is subject to income tax, USC, PRSI and for many people will amount to 51% of gross rental earnings if they already earn over €33,800. So keep all your receipts and bills and speak to tax adviser before you file and pay.”

Airbnb is here to stay. If everyone has to pony up for the tax, the nightly rate may go up, but with a typical cost in Dublin of about at c$60 a night and c$40 outside of it, a 20% price hike should go some way, after legitimate deductions, to meeting that Revenue bill. 

Letting a room once a week at €60 for 52 weeks is an extra €3,120 income, which many people will certainly welcome.  But income like that can tip some people into a higher tax band, trigger disqualification for certain social welfare payments and even a CGT payment if and when you sell your home.

This is certainly the case for B&B owners who have to offset the income they’ve earned over the years with the 33% CGT liability they will have to make on the portion of the value of property from when they began using it as a B&B and its sale value. 

Airbnb (and non-tax paying hosts) has been criticised for taking business away from legitimate, tax-paying B&Bs and hotels, but also for taking rooms out of circulation that may have otherwise been let out to students. There’s no hard evidence to support this, though I’ve heard plenty of people suggest they’d prefer to Airbnb a spare room even just two nights a week for €120 (tax-free) than charge the same to a student via rent-a-room and have them live in their home for nine months. 

They may want to think again. Nothing beats the €12,000 tax free income from the rent-a-room scheme, especially now that the Revenue have re-iterated that Airbnb income is fully taxable. 

If you have a personal finance question for Jill, please email her at HYPERLINK "mailto:jill@jillkerby.ie"jill@jillkerby.ie or write to her c/o this paper.

CHILD BENEFIT PAYMENT  VS  THE BACK TO SCHOOL BILL

Inevitably the call goes out from children’s charities and community organisations at this time of year for more money to be spent by the State on assisting families to kit their children out for the new school year.

Barnardos Ireland, the children’s charity want another €103 million a year allocated to the primary school budget in order to provide a genuinely free education with the provision of free books, uniforms, transportation, lunches and other services.

Out of an annual Department of Education budget of €8.8 billion for 2015, that €103 million doesn’t sound like a lot. Especially since the Minister for Finance claims that he has at least another c€1.5 billion in excess tax to dole out to interested parties (including Barnardos) in next October’s Budget. (He seems to be favouring a universal social charge (USC) tax cut.)

There’s much to argue in favour of entirely free primary education since most people accept such expenditure is an investment in the nation’s future. But with the election looming, it will be an entirely political decision as that €1.5 billion is fought over by every Cabinet minister, each of whom believe their claims are just as worthy.

Where they may have more leverage than the Minister for Education is that parents already receive about c€2 billion in annual Child Benefit (CB) payments, theoretically for the use of their children’s needs that include school expenses like new books and uniforms.

A survey in July by the League of Credit Unions found that about a third of parents said they would have to borrow money to meet the c€250-€450 cost of kitting out their primary and secondary-going children respectively this year. But they were never asked whether their monthly tax-free child allowance of €135 per child or €1,620 per annum (€3,240 for two children, €4,860 for three) was being allocated.

While a small number said they would have to cut back on food for themselves to meet the €250-€450 expenditure, or even go to a moneylender for the money, others admitted that the back to school costs would prevent the family from taking an annual holiday.

To me, this points to a budgeting crisis, not a solvency crisis for many of the parents surveyed. Unless you absolutely need the €1,620+ to put food on the table or pay the rent (and if that is the caseyou definitely need to seek help from MABS, the DPS, Barnardos) the majority of parents should be able to meet the cost of books and uniforms out of their annual CB payment. School clothes and books are essential budget expenses and like rent, food, heat, should come before all discretionary spending.

Meanwhile, in addition to the €2 billion collectively paid to every school going child to age 18 (whether they have to wear a uniform or not), the Department of Education pays out another €44.3 million to the lowest income families at €100 per primary child and €200 per secondary going child. 

The reasons why parents have difficulty meeting the cost of books and uniforms are not explored in the surveys, but in vox-pops many cite high child-care costs, mortgages and rents as the main reason why Child Benefit (CB) payments are not used to meet their children’s’ individual needs.

Which points to a whole set of other issues - like why the huge mortgage debt legacy since the 2008 crash has still not been resolved post 2008; the reluctance by the State to raise taxes (or redeploy existing taxes) to fund State-sponsored universal childcare; and why it is unable to formulate the right policies to meet the urgent need for more affordable housing, especially in the greater Dublin area.

Will these issues be resolved in the October Budget? Not likely.

But in the run-up to the 2016 election parents might see their monthly CB go up by another fiver; free pre-school hours extended and the Uniform and Footwear Allowance widened for the 2016 school term. They may also see a drop in the universal social charge they have to pay for 2015-2016.

Meanwhile, for next year, in case none of this happens, be a little more pro-active: if you can, set aside a portion of the Child Benefit every month into a separate book and uniform account at the local post office, credit union or bank.

If you have three children, one in primary and two in secondary school, you should set aside €101 every month to meet what the League of Credit Unions claimed in its July survey will be the annual cost of three sets of books and uniforms: about €1,206 out of the total CB payment of €4,860 a year.

If you have a personal finance question for Jill, please email her at jill@jillkerby.ie or write to her c/o this paper.