Changes to Exit Tax for policies sold after 1/1/2001

Irish tax is payable on any investment returns made on a life insurance policy. Tax is paid at the rate which applies for customers of life insurance companies (currently 23%). This tax rate is equal to the standard rate of income tax (currently 20%) plus 3%. Where the charge applies, the life insurance company deducts any tax due from the value of the policyholder’s investment and pays it to the Irish Revenue. The life insurance company then pays the policyholder the after tax amount.

So what has changed?

Before the new tax rules came into effect, Irish tax was payable on investment returns:
· if the policyholder made a withdrawal (full or partial) from their investment;
· if the policyholder took an income from their investment;
· if the death benefit was paid;
· if the policyholder transferred all or part of their investment to somebody else (although there were some exceptions to this).

After the new rules came into effect, Irish tax is now payable in all of the above circumstances and on every eighth anniversary of the policy.

This means that, from now on, tax will automatically be deducted from the value of the policy on each eighth anniversary. The tax paid on each eighth anniversary will reduce the amount invested in the fund from that date onwards.

Where tax is deducted from the policyholder’s fund on each eighth anniversary, this tax can be offset against any tax that is payable on a subsequent full encashment. Therefore if the policyholder decided to cash in their investment on, say, the ninth anniversary then the amount of tax due, based on investment returns over the nine years, would be reduced by the amount of tax they already automatically paid on the eighth anniversary.

The new rules affect all categories of life insurance, including savings, investment and linked protection.

These changes were brought into law as part of the 2006 Finance Act. They apply to all policies sold on or after January 1st 2001. This means that the first actual deduction of tax won’t take place until January 1st 2009.

Stage Payments on Housing Estates to be abolished

Junior environment minister Noel Ahern has announced that the practice of stage payments in housing estates is to be ended. Stage payments are common practice for once-off self-build houses, i.e. you're building a house on your own site and instead of getting your mortgage cheque all at once you get it in stages as work progresses on the build.

But in certain parts of the country (rarely in Dublin for some reason) developers building housing estates were asking for stage payments from purchasers, so you'd end up paying a partial mortgage before your house was near completion. This practice is now being abolished where contracts are entered into from June 30th 2007.

Stage payments for people building their own homes will not be affected.

This is good news - it always struck me as cheeky that a developer could end up getting interest-free development finance for a housing estate - it was the purchasers who paid interest on the stage payments.

Switch your equity SSIA to cash if you're getting out soon

The vast majority of SSIAs will be maturing in April 2007, the final month of the scheme. A portion of these (admittedly not a huge portion) are equity-based Managed Fund SSIAs. If too many of these equity-based SSIAs are actually cashed in at the same time, it may cause a dip in the funds or cause the fund manager to impose a Market Value Adjuster (MVA) - a sort of penalty for cashing in at that point. Some SSIA providers have already done so.

To avoid this possibility, I'd recommend that equity-based SSIA holders who intend to cash in during April 2007 should ask their provider if they can switch funds now to cash to avoid such a penalty. You may miss out on any fund growth during the final months, but you'll certainly miss the penalty.

Of course the alternative is to defer cashing in your SSIA for a few months.

At last a mortgage price war

AIB yesterday announced cuts in their tracker mortgage rates, with rates as low as ECB + 0.45% for the first year and ECB + 0.6% for all subsequent years. This is seen as direct competition for National Irish Bank's recent competitive tracker offering.

As National Irish Bank don't distribute through mortgage brokers, the other lenders have to date held off cutting rates to see what effect on the market the NIB move would have. But AIB do distribute their mortgages through brokers, so I'd expect that AIB have started a rate war, as mortgage brokers are likely to be far less prone to inertia than the general public who National Irish Bank target.

Roll on some more rate cuts in the next few weeks...