Impact of missing receipts on tax bill
Your questions answered
Query: My husband and I bought a small derelict cottage as a holiday home in 1982 and spent about €75,000 between the purchase price and renovation. We are now selling it for €135,000 and buying another holiday home closer to our primary residence. As it was never our intention to sell, we did not retain the vast majority of the relevant receipts and we are now wondering how our Capital Gains Tax (CGT) liability would be calculated. Any advice would be gratefully appreciated. Mary, Douglas, Co Cork
CGT is a tax on a chargeable capital gain (profit) arising on the disposal of an asset owned by you. It's charged at a rate of 33pc. At its simplest, the chargeable capital gain is the difference between the price you paid for the asset and the price you sold it at.
The Revenue Commissioners state that when calculating your CGT liability, you may deduct the following items: the cost of purchasing the asset, any money spent by you which adds value to the asset (known as enhancement expenditure), and costs when you acquired and disposed of the asset (such as fees paid by you to a solicitor or auctioneer).
In your question, you stated that you bought a small derelict cottage as a holiday home in 1982 and spent about €75,000 between the purchase price and renovation. To calculate the chargeable gain, the first part of your calculation is to separate the purchase price from the renovation costs.
You have stated that you purchased the property in 1982 - therefore, indexation relief will apply to the purchase price as you owned the property before 2003. The exact date of the purchase is essential as the indexation relief applicable is dependant on the purchase being before or after April 6, 1982.
If the renovation costs that you incurred relevantly enhanced the property, these costs will qualify as enhancement expenditure - however, you will require documentary proof of these payments to be eligible for the relief. As you'll see in the example below, this could have a significant impact on your liability - so I would encourage you to make every effort to locate these receipts or to have the suppliers of the services provide you with receipts.
With indexation relief, enhancement expenditure before 2003 can also be adjusted for inflation at the rate applicable to the date that the work was carried out. Here is an example of how your liability would be calculated if the costs were separated into €50,000 for the purchase costs and €25,000 for the renovation costs.
Using the Revenue multiplier of 2.253 for indexation relief, the original purchase price of €50,000 comes to €112,650. If you can show proof of €25,000 in enhancement expenditure, the total cost comes to €137,650 and you would have no CGT liability. Using the same example and without proof of the enhancement expenditure, the chargeable gain comes to €22,350 (That's calculated by deducting €112,650 from €135,000 and does not factor in any purchasing or selling costs). The first €1,270 of any chargeable gain is exempt from CGT for everyone.
You state that you own the property together so this means the first €2,540 (€1,270 multiplied by two) of the gain would be exempt. This would bring the chargeable gain to €19,810 and as the tax due on that gain is charged at a rate of 33pc, your tax bill would come to €6,537.
Gift of money from US
Query: I was gifted $10,000, which is held in an account in the United States. The account is not earning any interest. Due to poor exchange rates over the last few years, I haven't yet transferred this to my Irish account (I am resident in Ireland). Should I wait until the currency exchange improves in my favour or should I transfer the money now to Ireland and put it into an savings account that earns interest? I am thinking about the State Savings' 10-year National Solidarity Bond as I want to use the money for my child's college in 10 years' time. Or is there a better savings alternative for a lump sum? Elizabeth, Salthill, Co Galway
It would be wrong to state that the exchange rate has been poor as it has steadily increased from 10 years ago and this shouldn't be a reason for you not to convert your gift to euro. The exchange rate for one US dollar against the euro 10 years ago was €0.64; five years ago, it was €0.75; and in early July 2018, it was about €0.85.
Many commentators believed the two currencies would reach parity in time - the current sentiment is towards a stronger euro though.
The investment goal for this money is for your child's college costs in 10 years, and you have identified the 10-year State Savings bond as a suitable vehicle. The advantages of this investment are that it is 100pc protected by the State, there is tax-free growth and there is a total return of 16pc guaranteed - or the equivalent of 1.5pc Annual Equivalent Rate (AER).
This investment should tick many boxes for you around security and allow you to plan with a future figure in mind. On a negative note, historical average inflation rates in Ireland are 1.6pc, and as the investment is guaranteed to return 1.5pc AER, this return would be undercutting the historical average annual inflation rate.
Before answering if there is an alternative investment option for you, it is essential to factor in your past investment experience and how comfortable you would be with volatility.
By far the biggest mistake we as financial planners see people making is using short-term investment vehicles such as bank accounts, deposit products or Government bonds to save for long-term goals.
It was understandable after the global financial crisis for people to seek safer investment vehicles. However, historical annual returns on equity markets are 7pc. An investment vehicle tracking an equity index for 10 years or a well-diversified well-constructed portfolio could be an alternative option for you if you are comfortable with the different risk levels involved.
Getting by in retirement
Query: I retired a couple of years ago on a pretty abysmal private pension. I qualify for the full State pension though. I also have about €10,000 in savings but, since I gave up work, I keep dipping into those savings as I find I don't have enough between my State pension and my tiny private pension to get by on every week. I also have plenty of young grandchildren and can't help buying them presents and clothes. How can I get by better financially each week - without dipping into my savings? Jo, Baldoyle, Dublin 13
Qualifying for the full State pension pays you €243.30 per week or €12,695 per annum. As the State pension normally equates to around 34pc of the average industrial wage, relying on this to fund your retirement isn't practical, hence the need for people to plan a proper private pension.
You ask for advice on how you can get by financially each week and I would encourage you to keep to basics. Do a simple budget on where your money is going on a week-to-week basis. There are many tools online that you could use for this such as the MABS budgeting tool (www.mabs.ie) After this, examine all your utility bills to ensure you are availing of the most efficient price plans. Finally try to have the discipline to stick to this budget when you have it in place, while still making room to treat the grandchildren.
- Patrick McGettigan is principal at McGettigan Financial Planning
Sunday Indo Business