Your personal finance questions answered

Equity release

A recent article in The Irish Times dealing with equity release loans mentioned that Bank of Ireland does not expect to receive any repayments during the term of a LifeLoan. Does this mean that the bank will not accept repayments - whether towards capital or interest - against such loans?

The rate of interest charged on this type of loan is well in excess of twice the normal rate applied to interest only mortgages, and is compounded during the course of the loan, and it would seem inequitable that, where a borrower's circumstances allow for it, the bank would refuse to accept payments against the accruing interest alone.

M.J., Dublin

As you say, the terms of the LifeLoan, as with other equity release products pitched at the elderly market, are hardly competitive when compared to interest rates available on other mortgage type products.

It is also true that the product is designed to accommodate the fact that there will be no repayments during the life of the loan. As Ms Olive Moran, marketing manager, mortgages, at Bank of Ireland puts it: "The product is designed to enable people who do not have other income to release a portion of the equity as a lump sum."

Having said that, she assures me there is nothing in the terms and conditions of a LifeLoan to stop anyone repaying all or part of the loan ahead of time. But there is one caveat. The rate of interest - currently 6.4 per cent - is fixed for 15 years. So anyone looking to make repayments faces a "break" penalty.

Basically, the bank is "borrowing" the money for a 15-year period at a certain rate. It would argue that, while you might decide to pay it back early, it is tied into the 15-year arrangement with the source of the money. As such, it will charge you a sum up to what it estimates it will cost to "service" its borrowing over the term.

While I tend to be very sceptical about the true cost to the bank of breaking a fixed loan, it is fair to say that this arrangement applies to all fixed interest mortgages, not just the LifeLoan and not just Bank of Ireland.

First Active

As a mortgage holder and account holder with First Active, I received 900 shares. I also received 90 bonus shares. I also purchased 421 shares in October 1998. I would be grateful if you could tell me what my tax liability will be on October 31st.

Ms M.M., email

As you say, the October 31st deadline for the payment of capital gains tax due as a result of the takeover of First Active by Royal Bank of Scotland is approaching rapidly. I'd love to be able to tell you there was an easy answer to your question, but the First Active situation was complicated by the capital reduction programme. Any capital-gains liability that arose as a result of that exercise was due at the end of last October.

Confused? You're hardly alone, judging by the emails I have been receiving recently.

The first thing we have to do is go back to that capital reduction programme in June 2003. What the bank did was to "issue" two shares for every share you held and then cash them in at 56 cents each to allow it to pay you €1.12 per original share held.

Of course, you would not have noticed this process, as it was a technical exercise although you do no doubt remember the cheque for €1.12 per share you received.

You had 900 free shares, for which you would have received 1,800 bonus shares in the capital reduction programme. You also had 90 loyalty shares paid out on the first and second anniversaries of the September 1998 flotation, which attracted 180 bonus shares. None of these was paid for and therefore would account for the most significant capital gain.

You also had 421 shares that you bought in October 1998, shortly after the flotation. These would have been allotted 842 bonus shares. You do not say what the shares cost, but, as your original 421 shares was now divided into three, becoming 1,263 shares, a third of the original purchase price would apply to each.

The key issue is that the bonus shares were assumed to have been acquired at the same time as the original shares. In your case, this means the original free allocation of shares was acquired first, followed by the bought shares and then by the loyalty shares (44 on the first anniversary of the flotation and 46 on the second).

The importance of this is the "first-in, first-out" rule governing share sales for capital gains purposes.

This rule means that if you hold shares in a given company acquired at different times, the Revenue will assume that the shares you first acquired are those that you dispose of first.

In this case, you had a total of 2,822 shares received in the capital reduction programme, which were "sold" at 56 cents each. The first to go on the "first-in, first-out" rule are the 900 free shares granted in the flotation and the 1,800 bonus shares allocated to them. That gives you 2,700 of the 2,822 shares you need. As they had no acquisition cost, each of these 2,700 shares was deemed to have a gain of 56 cents - a total of €1,512.

The balance of the 2,822 shares to be sold at that time - 122 shares - came for the 421 shares you bought and the 842 attendant bonus shares, each of which has a third of the purchase price. You do not indicate the price at which you bought the shares but, when they first traded after flotation, the price was €2.86. For the purposes of illustration, this would mean each of the 421 bought shares and the 842 bonus shares would be worth 95.3 cents each. Given that they were cashed at 56 cents, you would effectively make a capital loss on these shares. This would be offset against the €1,512 gain on the free shares.

As a result, it is likely that you will have had only a tiny capital gains tax liability in October last year as you can make a gain in any year of €1,270 on the sale of assets without paying capital gains tax.

Okay, so that's the history lesson. Where does that leave you now? Well, you effectively still had 1,411 shares at the time of the Royal Bank of Scotland takeover. Of these, 1,141 are the bought shares and their attendant bonus shares, each of which is considered to have cost you a third of what the original 421 purchased in October 1998 did cost. In addition, you have 90 loyalty shares and their attendant 180 bonus shares, a total of 270, each of which is deemed to have cost you nothing.

The takeover price was €6.20 per share so the loyalty-related shares net you a profit of €1,674 (€6.20 x 270). As to the rest, obviously the price you paid determines the profit, but using the illustrative €2.86 per share price referred to above, each of the remaining 1,141 shares would now be deemed to have an original purchase price of 95.3 cents (€2.86 / 3). That would yield a capital gain of €5,986.83 (€6.20 - €0.953 x 1,141).

Once you work out your total gain, deduct your capital gains tax allowance of €1,270. You will owe the Revenue 20 per cent of the balance.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, D'Olier Street, Dublin 2 or e-mail to dcoyle@irish-times.ie. This column is a reader service and is not intended to replace professional advice. No personal correspondence will be entered into.