Jill Kerby

FILE AND PAY – THE TAX DEADLINE YOU DON’T WANT TO MISS

You have one month. Or, one month and 13 days if you have a computer, access to the internet and can follow some pretty simple on-line instructions. 

I’m referring, of course, to the annual deadline that hundreds of thousands of people come to dread every year:  the Self Assessment File & Pay tax deadline and it applies to the self-employed and sole traders; people in receipt of foreign income, like a pension, rental income and of course, PAYE earners who have separate income from a source other than their employed job.

The file and pay deadline, as always, is Halloween, October 31, or, it you file on-line at the Revenue’s website, www.ros.ie, November 13.  

This ‘self-service’ website, as the Revenue describe it, has been tweaked and streamlined over the years making it quite user-friendly, and if you are willing to read the step-by-step instructions carefully, a lot easier to follow than you might imagine. 

Ideally, novices might ask a friend or acquaintance who successfully files on-line to sit with you as you register your new Revenue account. It will take a few days to process your registration, so it needs to be done sooner than later so that you can then proceed to fill in your eForm12 tax return and pay whatever tax you might owe.

Some people find the discipline of a single file and pay date very difficult (there is an option to spread your tax payments over 12 month, but carries an extra charge) because you need to religiously feed a bank account marked “taxman” in order to have enough money to meet your tax liability. Still, in North America where the self-employed must file their taxes quarterly, often say they are deluged with time-consuming paper-work and/or higher accountancy costs.)

Meanwhile, my colleague and co-author of the annual TAB Guide to Money Pensions & Tax, tax adviser Sandra Gannon, says that at least half of all her new clients – even PAYE ones - will have a tax refund coming to them, typically €500-€800 because they haven’t claimed all their tax credits from the previous four years. The four years, as they apply for this file and pay deadline are 2011, 2012, 2013 and 2014, so it is also in their interest to File & Pay…and claim their refunds.

So what sort of tax refunds might you expect if you also happen to fall into the category of person who now needs to make an annual tax return?

First, it should be said that many tax refunds, most of which are at the standard, 20% income tax rate, have been scaled back in recent years, as in the case of the €1,000 spending cap for health insurance premiums.

Some tax reliefs have been abolished – for trade union fees (in 2010) and bin charges (from 2012) for example, so you will only be able to only claim the latter for 2011 out of the current four year refund cycle.

These are small amounts at stake, but outside of the usual self-employed business expenses, including a proportion of your rent, lights, heat, insurance if you work from home - the most significant tax refunds are for private pension plan contributions or AVC top-ups (Additional Voluntary Contributions), private health insurance premiums, medical and dental expenses, rental tax relief if you are a tenant, income tax relief on expenses if you are landlord, certain third level education fees and nursing home and the €810 annual home carer’s credit.

Some tax credits are applied at source – such as scaled mortgage interest relief (which will be gone in 2017 for everyone) and private health insurance. In the latter case if your employer pays the insurance, you must claim the tax relief directly.

Medical and dental tax credits are refunded only for approved treatments and conditions, medical appliances (like a walker or wheelchair) or certain prescribed foods for diabetics or coeliacs, for example. This applies to qualifying treatments taken abroad.

Rental tax relief is also being phased out and can no longer be claimed by anyone who started renting their home after December 8, 2010. Third level fee tax refunds apply on for named institutions and courses and apply strictly to fees, not registration charges, and the amount that can be claimed against is reducing every year and is also capped.

Most tax refunds are for the standard rate of income tax – 20% - but two remain at 40% - pension fund contributions/related protection policies and for nursing home and home nursing/care expenses.

The clock is ticking.  To stay within the tax deadline and avoid late penalties and surcharges, go on-line now and complete an accurate return. Or hire a tax adviser to do it for you.

The tax-man, though maybe not publicly…will thank you for it.

If you have a personal finance question for Jill, please email her at jill@jillkerby.ie or write to her c/o this paper.  Copies of Jill’s Talking Money Guide, sponsored by Irish Life, can be downloaded at www.irishlife.ie. Or request a signed, hard copy via her email address.

FINANCIAL MISSELLING HASN'T GONE AWAY

Our past record in protecting the vulnerable in this country has been pretty abysmal at times, and that goes for vulnerable elderly people who may have been seeking financial and investment help.

Too many older people, with cash in their bank and building society accounts were particularly easy prey during the boom years of the Celtic Tiger. Interest rates were much better than they are today, but even at 4%-5% they looked puny back then compared to the profits from property transactions and from the stock markets.   The banks in particular – with access to the amount in their accounts – knew that there was a potential sales commission bonanza to be had by convincing their cash-rich customers – many in their 80s - to shift some or all of their money into investment funds, ubiquitous six year “tracker bonds” and even portfolios of stocks and shares, sold by their sister stock market firms.

By the mid-2000’s, the misselling complaints were begining to arrive on the desk of the Office of the Financial Services Ombudsman; by 2008-9 it has become a flood. So much so that an alarmed Consumer Director at the Central Bank was sending guidance notes to the industry on their duty of care to older, vulnerable customers including recommending that such clients bring along a trusted third party to attend meetings in which investments and other expensive financial products were being proposed or discussed. This person typically would be a close relative, friend or other adviser like an accountant or solicitor.

During 2008-9, the Central Bank undertook an investigation itself into the treatment of older people and sent out 14 ‘mystery shoppers’ aged between 72-79 to a number of banks and building societies. They posed as people with a sizeable lump sum to invest but with little or no investment experience or knowledge.

The outcome wasn’t great. In far too many cases the required sales protocols were not followed such as doing a thorough fact-find; ensuring the proposed products were suitable; explaining everything clearly; determining the client’s risk and reward tolerance; explaining all the costs and charges and also recommending that they bring a third party witness/advocate along.

Eventually, best practice requirements for ALL investors, including vulnerable ones were set out in the revised, 104 page Consumer Protection Code 2012 and in the additional guidance notes sent to intermediaries.

Today, the hope is that every broker, sales intermediary and financial adviser is following the Code and the Central Bank guidance notes, but judging from the cases still coming before the Financial Ombudsman (published in his annual reports) and from the many letters and emails I get from readers, this isn’t necessarily the case.

Recently, I was as ked by my own financial adviser, a fee-based Certified Financial Planner, if I would act as the third party witness for an elderly couple, who have no children or family in Ireland. They had become his clients after suffering a huge financial loss – c€350,000 - as a result of a highly unsuitable, high risk investment of just 15 shares that had been recommended to them back in the mid-2000s. Having shifted what was left of their money into deposits, but realising this was also unsuitable, they were now seeking a proper, long term, cautious financial plan to see them through to their advanced old age.

The meeting I witnessed lasted over two hours as the adviser’s recommendations were explained line by line (including all the consumer protection elements laid out by the 2012 Code).  My role was to ensure that they understood what was being explained and to ensure that they were not under undue pressure. (Eventually, after considering the report in the comfort of their own home, they agreed to some, but not all of the recommendations and further amendments they could live with, were made to their plan. I’m satisfied that this time they do fully understand the implications and consequences of the informed  decisions they’ve made.)

The meeting I was privileged to be as ked to sit in on (with the clients’ permission) is probably as good a template for every financial meeting that vulnerable, older people should be having with their broker, adviser or financial planner.

Investing properly – especially if a long term financial target like your retirement income is involved – can be complicated at the best of times. You want not just an experienced adviser on your side, but one who makes it their business, especially if you are an older, inexperienced investor, to make sure that you are not just fully appraised of the commitment you are making, but that you are under as little stress or discomfort in meetings that can be nerve wracking for someone who is more financially astute.

The last thing that should happen is that the process is rushed. And if any broker or adviser tells you bringing a third party along is unnecessary, just walk away. And tell them to review their own industry Codes of practice.

Meanwhile, the Talking Money Guide – to accompany my RTE Drivetime radio slot with mortgage broker and financial adviser Karl Deeter – is just out, sponsored by Irish Life.  You can download a copy by going onto the Irish Life website, www.irishlife.ie or I can send you a signed, hard-copy by writing to me with your address at jill@jillkerby.ie

WE’RE SAVING MORE…AND SPENDING MORE

Europe is full of savers. So is Ireland. According to Eurostat the gross household savings rate in the 19 state eurozone to the end of 2014 averaged 12.71% and 10.56% in all 28-member countries. Here, at the end of 2014, it was 12.69%.

Even though the rate has come down slightly in recent years, savings are still relatively high on average because the EU is a two or even three tier economic club and the wealthy countries are clearly distorting the statistics: Sweden comes in at the top with a whopping savings rate of 18.26%, followed by Germany (16.26%), the Netherlands (14.84%), France (14.72%), Belgium (13.47%) and Austria (12.84%). The Swiss outrank everyone with a 21.99% rate but even we are still saving c12.7% (up to the end of 2014). 

Meanwhile countries like Latvia, Lithuania, Cyprus, Greece and Poland all have low digit (or even negative) savings rates which reflect their serious or ongoing economic problems, while others – like Denmark and the UK, both outside the euro currency area, with just half the household savings rate we have – represent relatively strong economies with low unemployment and far more confident consumers.

The really high savers – the Swiss, Swedes, Germans, Dutch, French, Belgians and Austrians – represent another narrative:  the Germanic speakers have relatively low unemployment (though not Sweden) and relatively strong GDP; but they also have ageing populations. The French and Belgians have high unemployment, especially youth unemployment, massive public debt and a very large cohort of older people.  None of this is conducive to a lot of spending, even in countries where social services for older people are generous. 

Overall, the volume of EU saving is not as high as it was, but this reflects the continuing, steady, paying down of debt (especially in Spain, Portugal, Ireland and Greece) more than it does any great explosion of spending.

We in Ireland seem to defy nearly all of these patterns. Last week, the UK building society Nationwide UK (Ireland), that produces a regular Savings Index, reported that 27% more people – most of them older - are unhappy with the very high deposit interest tax (41%-44%) paid here on their savings. Yet there is also a 2% increase in the positive saving sentiment (51%), reflecting perhaps the improved confidence in the economy generally and the fact that consumer spending here is up 2.8% over the past year.  By European standards our economy – GDP is up 6.7% over the past 12 months and GNP by 5.3% GNP – is positively booming (mainly thanks to low oil prices and the low euro for exports).

That consumer statistic is also more nuanced. It reflects all the new households created by the newly employed rather than widespread consumer confidence. We shouldn’t look gift horses in the mouth, but there are too many communities that the new jobs and consumer mini-boom have passed by.

These communities, often over-represented of older people, are certainly propping up the household saving statistics, joined by cohort of younger savers securing new jobs and keen to start nesting; they need to put together 20% of the price of a new home under the Central Bank’s mortgage lending rules.

So who is offering the best deposit rates right now?

Unfortunately, that picture is the least rosy of all. On the same day that the Nationwide UK (Ireland) savings survey came out, KBC Bank announced yet another variable interest rate cut for new home-borrowers.  As borrowing rates continue to fall (albeit very slowly) this could spell more bad news for savers. KBC’s ‘easy access’ demand rate on a minimum deposit of €3,000 is just 1.25% and just 0.5% on sums over €100,000 and their fixed rates (up to 18 months) are as little as 1.1% - 1.2% but with Nationwide UK (Ireland) are among the best on the market.

You’ll do a little better with a notice account of 30 or 90 days with RaboDirect. It’s offering between 1.25% and 1.45% interest. Meanwhile, the best rates continue on monthly savings of up to €1,000 from EBS (2.25%), KBC Bank (3%) and Nationwide UK (Ireland) (4%).

Only State Savings offer DIRT-free returns, but you will still have to tie up your money for at least 10 years with An Post to achieve a 2.25% annual return. Their four year bond is providing just 0.99% per annum net.

“There is no deposit yield worth talking about anymore,” a financial adviser told me last week. He described how older clients even very wealthy ones “are astonished” at how much investment risk (that includes ‘safe’ cash, bonds and an annuity in addition to some shares) they must accept if they want to achieve even a modest but sustainable long-term annual return of just 3%.

Notoriously reluctant to make predictions, he made this one:  “There is no sign that central bank base rates – which influence retail rates – are on their way up.” 

We’ll know for sure on Thursday, when the US Federal Reserve date meets again to decide if they’ll hike the US rate for the first time in 10 years.

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

THE GIFT TAX EXEMPTION RULE THAT BENEFITS THE VERY FEW 

Inheritance and gift tax is an issue that can generates a certain amount of heated debate.

One side - a minority, I would suggest – insist that unearned income deserves to be heavily taxed; the other side, meanwhile argues that that everyone should have the right to pass on their property and assets to anyone they want, ideally tax-free.

For the latter camp the strongest argument is that the assets accumulated during a lifetime have probably already been taxed to the hilt. Certainly in the case of a family house that you wish to leave or give a child, the property would probably have been purchased (and the mortgage paid) with taxed income and DIRT tax would have been further paid on the savings that went into the down payment. The owner would have also probably paid Stamp Duty, property tax and local authority charges and their after tax income would have to pay for the insurance, maintenance and upkeep of the property.

These are the arguments that have convinced 13 OECD countries/tax jurisdictions since 2000 to abolish estate/inheritance tax altogether, including high income tax Nordic countries like Norway and Sweden. Others countries with nil-inheritance tax (since 2000) include Austria, Brunei, Estonia, Hungary, Israel, Luxembourg, Mexico, Portugal, Serbia, Slovenia, Russia, Hong Kong, Macau. There is no inheritance tax in Australia, Canada, New Zealand or the Gulf states.

Others have a very low tax rate – with or without tax-free thresholds – such as Italy (4%), Poland and Switzerland (7%), Iceland (10%), Denmark (15%), Finland (19%), Netherlands (20%).  Here our capital acquisition tax (CAT) is the seventh highest in the OECD at 33% and the tax-free threshold between a parent and child is just €225,000, less than half what it was in 2009. (It is also €30,500 for other lineal relatives and just €15,075 between strangers.)

In Germany, where inheritance tax is 30% (the eighth highest) the threshold is €380,000; in the UK the tax is 40% but the tax-free threshold is nearly €454,000 (and can be avoided by gifting away your assets during your lifetime.) In America, there is no tax (40%) on estates worth up to $5.4 million.

Inheritance and gift tax exemptions also vary between countries.  In Ireland they are few and far between though agricultural and business reliefs are the most important because they allow family enterprises to be passed down unencumbered. There’s also the annual €3,000 gift exemption (c€10,000 in the USA) which allows anyone to gift or receive a maximum individual gift worth that much. It can be a very useful tax planning tool for everyone who wants to lower the tax burden on their loved ones.

And then there is the ‘Dwelling House’ CAT exemption.

Recently, I received a letter from a reader, a widow, whose son had been living for several years in a property she owned next door to the original family home in which she still resided. He was paying all the utilities and taxes and she wanted to transfer the deeds to him and wondered if he would have to pay any tax.

The dwelling house CAT exemption for inheritance/gift purposes applies to people who have lived with the owner (the ‘disponer’) for at least three continuous years prior to the disponer’s death and who at the time of the inheritance/gift was not the owner or part-owner of any other property.  They must also keep the property for six of the next seven years before disposing of it.

In the case of a gift of a dwelling-house, the CAT rule changed in 2007. Unless the beneficiary has been living in the only property or family home of the owner, and the owner/disponer is over age 65 and is dependent on the proposed beneficiary due to their age and infirmity, the gift will not be tax-free.

However, a disponer of any age can gift someone another property they own in which the beneficiary (who doesn’t have to be a relative) has been living for at least three previous years and fulfils the other conditions for the tax-free gift – that is, that they have never owned a property of their own when the gift is given and keeps the property for at least six out of the next seven years.

In the case of our reader, the son therefore can be gifted the second property tax-free and the gift will not impact on his usual €225,000 tax free inheritance threshold from her. The mother will be liable to 33% capital gains tax however on the difference between the original value paid for the property and its market value at the date of the transfer to her son.

This is an extraordinarily generous CAT/gift exemption, admit financial planners, since it means that anyone can leave a person (a relative or not) a second or multiple properties of any value tax-free so long as the beneficiary has lived in it for three continuous previous years and fulfils the other dwelling house exemption conditions.  It is also a hugely disproportionate tax break that only multiple property owners – people with existing means - will enjoy.

Should the Minister for Finance ease up on the CAT-free thresholds and the CAT rate in next month’s Budget?  Many believe he should as property prices keep rising and CAT bills soar. Tightening up the anomalous dwelling house gift rule might help him justify such a contentious decision.

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

IS CHINA A REAL CONCERN…OR JUST MORE MARKET NOISE?

Since most people don’t have a clue about how much their pension fund is worth (unless they are on the verge of retirement) the latest global stock market correction, inspired by China, probably hasn’t registered much on their personal financial radar.

And that probably isn’t a bad thing. Stock market volatility is a) inevitable, and b) completely out of your control.  The only thing you can control is your reaction to that volatility. Unfortunately, when there is a big stock market collapse – 2008 was the last one - the collective track record of most investors is not particularly good. 

Human behaviour being what it is when it comes to money, the usual response by far too many investors is to sell when they see the value of their assets falling, and to buy when they see the markets going up.

Last week, ‘the markets’ that count for most of us reacted with some alarm to the huge fall in China’s Shanghai Composite stock market in which nearly all its investors are Chinese, not westerners.

The wider stock market reaction was due not just to the collapse of the Shanghai market on foot of poor growth projections for the Chinese economy, but also uncoupling of the Chinese currency from the US dollar. In a somewhat desperate attempt to boost exports, the cheaper yuan should make Chinese manufactured cheaper again and while this is good for international consumers it isn’t for other, rival country’s exports (like America’s) and ultimately, the debt repayment ability of countries that could lose business to the Chinese.

With the Chinese government and its central bank now doing everything to get its economy firing on all cylinders - lowering interest rates, lending huge sums to its banking and corporate sector, rescuing bankrupt industries, directly intervening in its stock market and letting their currency semi-float against the dollar – the question is whether US Federal Reserve raise its base interest rate this month.

A rate rise has been on the cards since the beginning of the year but is constantly postponed because of the negative effect it could have on the US stock market whose bull market since 2009 has been heavily supported by cheap credit printed by the Federal Reserve and ultra low interest rates.

China’s latest moves, and nervous global stock markets, some commentators are suggesting, could yet see more money printing (“QE”) in place of credit tightening.

The US economic ‘recovery’ hasn’t quite worked out as the experts expected.

Like here, there’s still too much debt sloshing around, and while more jobs have been created, there’s been too little wage growth. Ageing populations with insufficient savings means there isn’t a lot of new spending. Tightening what credit is available if interest rates went up could make what has been a mostly Chinese-inspired “correction” turn into something more serious.

If you have a private pension fund or AVC (and c880,000 people do), or if you own stocks and shares, its value may have fallen and then risen again and maybe even fallen, such is the uncertainty at the moment.

Yet volatility is something you need to accept if you invest in stock markets, no matter how irrational or inconsistent it appears. (For example, there was practically no market reaction during the Greece crisis earlier this summer and the very real risk of it leaving the eurozone.)

After speaking to my own financial adviser last week about the latest market hiccups and then about the impact on Irish pensions (including my own), this is what he said:

“If someone isn’t retiring, say, within the next 10 years, and the fund is already pretty well-diversified and it suits their risk profile and the charges and fees are as low as possible, they should do nothing. Sit tight. You can’t access pension money anyway and it attracts generous tax relief. It can and should be rebalanced by the fund manager or adviser each year.

“But if you are nearing retirement, or you haven’t a clue what’s in your pension fund or you own individual shares that you cannot afford to see fall in value because you need to sell them now or in the near future, then you should speak to your company pension trustee/administer or seek an independent review. The last thing you want is to end up vulnerable to serious losses.”

We may now live in an interwoven global economy and what happens in one part of the world – like the Lehman Brother bankruptcy – can impact on our lives. But there’s not much point in worrying about the complex dynamics of individual markets (like China) or short-term monetary decisions taken by central banks, especially if you haven’t bothered to take some action that can affect your personal finances – namely, controlling your spending and debt and saving and investing prudently.

The rest, as they say…“is just noise”.

At least, let’s hope so.

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