Dominic Coyle answers readers' questions about their personal finances.

Capital gains

We are currently in the process of buying a second house, which we intend to use as our principal private residence. The house we live in now will be rented out.

We have lived in the house for five years and it has gone up in value by approximately €175,000.

We intend to rent this house out and I am wondering how the capital gains tax would be worked out if we held the house for, say, a further 10 years, at which time the house has risen in value by, for example, a further €200,000?

Mr J.V.B., e-mail

The first thing to note is that the current value of the house is not really an issue when it comes to the Revenue Commissioners and their view of capital gains tax on the property.

What is important is how long you live there, using it as your principal private residence and how long it is essentially a private property.

In the case you outline, you have been living in the house for five years and are looking to hold on to it for another 10 years, renting it out during this period. What the Revenue does is determine for what proportion of the ownership the house was a principal private residence.

In your instance, it would be one-third. As a result, they would look to charge you capital gains on two-thirds of the increase in the value of the property between its purchase and its sale.

You say the property has added about €175,000 in value in the past five years and, on your assumption that it would increase in value by about €200,000, you would argue that almost half of the increase in value came during your tenure as your principal private residence.

Unfortunately, the Revenue will work off a simple percentage.

Worse still, indexation, which would have adjusted your original purchase price to allow for the way inflation has eaten into the value of your investment, is no longer available.

When you come to sell your property, you will only be allowed adjust the price according to the Revenue-determined indexation factor up to the end of 2002. Any inflationary impact from this year on will have to be borne by you, following the ending of indexation announced by the Minister for Finance, Mr McCreevy, in his most recent budget.

DIRT at 65

Last week, you stated that Deposit Interest Retention Tax only applies on interest earned by people under 65 years of age. Is this correct?

Mr J.Q., e-mail

Not surprisingly, there has been quite a response to this item. It appears that there are differences of opinion in the Revenue on all aspects of last week's question.

First, the situation is that people below the income exemption limit are not liable to DIRT over the age of 65. Below that age, there is no exemption regardless of income level. Sorry for any confusion.

On the broader issue of how to avail of this, it appears the banks may be forced to deduct it with customers eligible for exemption applying for a refund on Form 54 D, which is available from the Revenue through its offices or its website.

Separately, there are conflicts of opinion on whether it is necessary to complete an annual tax return. To be on the safe side, the best advice is to complete a tax return in relation to any income received, including foreign pensions which may be taxable here, regardless of what people may have been told elsewhere.

Mortgage options

My wife and I currently have a 20-year €127,000 mortgage with Bank of Ireland, taken out in November 2000.

Having examined the First Active current account mortgage, it certainly seems to provide extremely attractive possibilities with regards to saving us time and repayments.

Using our savings, payouts from maturing SSIA accounts and by structuring our bills and direct debits to leave our accounts as far from our salary deposits as possible, we could potentially save up to 14 years and more than €48,000 (given steady interest rates).

But with both of us having been with Bank of Ireland for our lifetime and with every conceivable banking opportunity with the bank at the moment (car loan, current accounts, credit cards, savings account and mortgage), is there a possibility that this style of mortgage will be introduced by other leading institutions?

I would prefer to keep my history with the same bank. I understand that people are more likely to get divorced than change their bank, but the savings are certainly tempting.

Mr K.B., Dublin

Is there a possibility that other lending institutions, such as Bank of Ireland, will offer a growing range of innovative products, such as the current account mortgage? Yes. Is it likely? I wouldn't hold my breath.

You are right that customers are notoriously reluctant to switch banks for reasons that constantly amaze me. Customer loyalty might have been understandable in an era when local bank managers had real power and there was some value in building up a relationship. In today's world, it makes no real sense.

Think about it. By holding your mortgage with Bank of Ireland rather than, say, Bank of Scotland or AIB, you are throwing away money every month given the differential in interest rates. The same no doubt goes for many of the other services you use at the bank.

Can you imagine Bank of Ireland or any of its rivals being as profligate in how they spend money? The shareholders would go mad.

And, in today's soft money market, a short credit history with an institution is no bar to a loan - especially as they can and will check for bad credit history with other institutions before lending.

As to the value of First Active's product, it does certainly make sense for the fiscally disciplined. If you are someone who can budget effectively, it is quite likely that you will save money on your mortgage - although, again, you do need to offset the difference between First Active's interest rate and those on more competitive variable mortgages.

You also need to remember that variable-rate repayment mortgages will allow you to make additional lump sum payments against the capital borrowed over and above your monthly payment - including your existing Bank of Ireland mortgage - cutting the cost and time on the loan.

The danger of the First Active product is that you are tying all your financial services to an account that is secured on your home.

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. Due to the volume of mail, there may be a delay in answering queries. All suitable queries will be answered through the columns of the newspaper. No personal correspondence will be entered into.