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...

We really are independent mortgage brokers

First of all - a belated Happy New Year to all readers, friends and clients.

Just been doing a review of the mortgage end of the business for 2006.

We have always been keen to illustrate the advantage of going to a mortgage broker is that you'll get a choice of lenders, at no extra cost to yourself. To prove the point, I'm happy to publish that last year we actually placed business with seven different lenders and no one lender got more than 27% of our overall business.

I would be wary of anyone calling themselves a mortgage broker who actually only places business with one or two lenders or who places a majority of all their business with one lender. You'd have to question if they were really independent, unless there was an unusual commercial reason for this.

Dodgy mortgage brokers and estate agents

I watched the Prime Time Investigates programme on Monday night with interest. (You can download it from RTE - requires RealPlayer.)


Sadly, I can't deny that some of the practices that were mentioned do occur, specifically the ones referring to mortgage brokers illegally sharing confidential information with estate agents to whom they are affiliated. I had personal experience of being introduced to a mortgage broker at an industry Christmas lunch last year who was proudly able to announce the address of a property I was buying at the time, in front of all present. It wasn't any great secret that I was buying the property, but the principle was that I hadn't given any consent for the estate agent to pass my details over to the mortgage broker.


Obviously the issues raised in the programme were far more serious - the mortgage broker passes back confidential financial information about the client to the estate agent who then knows what the budget of the potential purchaser is, and tailors bidding to suit.


As is so often the case, the programme will probably do damage to the image of the mortgage broking industry in general even though any mortgage brokers of my acquaintance are honest professionals who are doing an excellent job for their clients.


I would have the following advice for any potential purchaser:

• Don't use a mortgage broker or solicitor who is offered to you by the property developer or estate agent. Choose each ideally from personal recommendation. Most firms are professional enough to keep a distance from each other, but as the programme proved, there is the potential for conflict of interest.


• When you're dealing with a mortgage broker, ask initially which lenders the broker represents. You should be looking for a list of at least half a dozen as anything less doesn't really offer a wide enough choice.


• When a mortgage product is recommended, don't be afraid to ask why that product is better for your needs than that of another lender.


• For all your mortgage needs, come to Ferguson & Associates! ;-)

Budget changes to Mortgage Interest Relief

In today's Budget, Brian Cowen announced increases to Tax Relief at Source (TRS) for mortgage customers, with the biggest increases for First Time Buyers.

The current annual ceiling on the amount of interest that can be allowed on a mortgage is being doubled for first-time buyers from €4,000/€8,000 single/married to €8,000/€16,000 single/married. The increased relief will be available to all first-time buyers who are in the first seven years of their mortgage.

The ceiling for non-first-time buyers is also being increased, from €2,540/€5,080 single/married to €3,000/€6,000 single/married.

For a couple buying their first home, the new €16,000 limit means that their maximum allowable relief is €16,000 at 20% or €266.66 per month jointly in a full tax year, provided that they pay at least €16,000 in interest in that year. Assuming a sample interest rate of 4.5%, their mortgage would need to be in excess of ~€350,000 to qualify for maximum relief.

The increase to €6,000 for a married couple on an existing mortgage (i.e. not First Time Buyers) is less generous - in a full year a couple paying at least €6,000 in interest will now get €100.00 per month TRS jointly, up from €84.66 per month.