Q&A:  Your personal finance questions answered

Q WHAT ARE the tax rules regarding gifts of money to one’s family members to reduce their mortgage balances?

Mr A.R., Dublin

A There are very clear rules governing the making of gifts to one’s family members – or anyone else – in your lifetime, or by way of inheritance after you pass on. The fact that the money is to help them reduce their mortgage balances rather than any other purpose does not change the nature of the rules.

Basically, such gifts come under the capital acquisitions tax (CAT) regime. CAT, which since last April is levied at 25 per cent, is often referred to as inheritance tax or gift tax.

The first thing to say is that the first €3,000 that you give to any person in any calendar year is not subject to tax, regardless of any other circumstances. For instance, you could gift a child €3,000 this year and €3,000 next year without having to even consider tax.

Thereafter, the liability to CAT depends on the amount gifted over a certain threshold. However, the relevant threshold depends on your relationship with the person to whom you are giving the gift. For instance, at the moment, you could gift a son or daughter as much as €434,000 without them having to pay tax on the gift. Of course, that presumes that they have not already received gifts (over €3,000) from you or anyone else within the same threshold category – ie their mother.

If you are talking about helping out a niece, nephew, grandchild, sibling or other “linear relation”, the threshold is now €43,400 – effectively 10 per cent of the threshold between parent and child.

For anyone else, the threshold is €21,700.

These thresholds, which are supposed to be indexed in line with the consumer price index, have been reduced this year. Up to April, the threshold in 2009 was €542,544 between a parent and child and €54,254 and €27,127 respectively for the other categories.

Equally, the tax charged on amounts gifted over the threshold has risen over the same period. In recent years, it has been levied at 20 per cent. In last October’s budget, this was raised to 22 per cent (a rate that came into force from November 20th). It was increased again in the emergency budget in April to 25 per cent (from April 8th).

Chasing negative equity

Q I read your negative equity survival guide with interest. However, one question came to mind that was not covered and I was wondering if you could perhaps through some light on it?

What happens if you are in negative equity and want to emigrate?

A number of English people came here in the early 1990s and left negative equity behind. Is the same thing plausible now only the other way around? How long does it take for one’s credit to reset and what is the statute of liabilities on a defaulted mortgage?

Mr E.T., e-mail

A Getting away from it all may sound like a good idea at the moment but it is not as easy as you might think. And, in any case, lenders tend to have long memories when it comes to these matters.

It is certainly true that in the last housing slump in Britain, there were cases of people simply handing back keys to banks – or even just leaving them in the locks – and walking away from homes that were worth considerably less than they had originally paid for them.

However, lawyer Paul Joyce, senior policy researcher on consumer credit law at the Free Legal Advice Centres, recalls that some of those who came to Ireland did receive subsequent contact from their lenders.

In any case, as Joyce points out, co-operation across European borders is now considerably improved on that era and it is now much easier for creditors to enforce judgments across borders – at least within the EU.

Joyce agrees that voluntary surrender can cut your legal costs. While the courts are bending over backwards at the moment to accommodate homeowners making any effort to get back on track, the fact that such cases are heard in a division of the High Court means the legal costs incurred escalate rapidly, exacerbating the existing debt problem.

And there remains the question of what will happen if you do hand back the property and the lender sells it on for a sum less than your outstanding mortgage.

This also raises problems in terms of when the property should be valued – is it when you hand over the keys or when it is sold and, if the former, how do you make a valuation in a market where little or nothing is selling?

In any case, the fact that you have handed back the keys of the property does not stop the clock on the mortgage lender pursuing a judgment against you through the courts over any deficit.

But what if you are gone well beyond Europe’s boundaries?

Well you may escape the impact of a judgment in the short term but it will not disappear and, should you return to Europe, never mind Ireland, it could catch up on you. It could certainly impact adversely on your ability to get credit.

And how long will your credit rating remain impaired? The fact is that your credit rating remains under a cloud until you settle your debt.

The bank can write off the debt but you could still find yourself with a blot against your name in the records of the credit checking agencies that lenders use in determining who to lend money to.

Even if you do settle any debt, your name remains on those records for five years subsequent to that.

Please send your queries to Dominic Coyle, QA, The Irish Times, 24-28 Tara Street, Dublin 2, or by e-mail to dcoyle@irishtimes.com.

This column is a reader service and is not intended to replace professional advice.

Due to the volume of mail, there may be a delay in answering questions.

All suitable queries will be answered through the columns of the newspaper.

No personal correspondence will be entered into.